Canadian Retail Markets Study

A Review of Competitiveness in the Canadian Refined Petroleum Marketing Industry
Prepared For: Industry Canada Natural Resources Canada Canadian Petroleum Products Institute

September 15, 1997
Suite 413, 1333 - 8th Street SW Calgary AB T2R 1M6 Canada 403-283-8704

Table of Contents
List of Figures _____________________________________________________ i List of Tables ______________________________________________________ ii Executive Summary _______________________________________________ iii Introduction _______________________________________________________ 1 Background Study Overview Report Format and Conventions Acknowledgments An Overview of the Model Competitiveness: The Pump Price Model in Motion Canada’s Petroleum Industry: Upstream and Downstream Upstream Industry Petroleum Refining Petroleum Marketing Taxation on Petroleum Products Pump Price/Margin Model: An Integrated View Marketing Sector Overview Competitiveness in the Retail Gasoline Sub-Sector Retail Gasoline Demand National Retail Petroleum Outlet Representation Retail Petroleum Outlet Modes Outlet Throughput Ancillary Services Gasoline and the Consumer Price Index Key Price History Margin History Canada vs. US Price History Rack Price History Demand vs. Price History 1 2 2 2 4 5 7 8 9 12 14 16 17 19 23 24 25 28 29 30 31 32 34 35 36

Part A Pump Price/Margin Model ____________________________________ 4

Part B The Structure of the Retail Petroleum Products Sub-Sector ________ 16

Part C Historical Trend Analysis ____________________________________ 30

Part D Selected Markets Study ______________________________________ 38

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Introduction Methodology Study Market Findings Market by Market Competitive Analysis Findings Conclusions Recommendations

38 38 42 52 72 74 80

Part E Findings, Conclusions & Recommendations _____________________ 72

Appendices _______________________________________________________ 82 I Glossary of Terms________________________________________________ 83 II Source Data Tables ______________________________________________ 85 Table A: CPI Index: Selected Goods and Services Table B: Key Price / Margin History - Regular Gasoline Table C: Canadian Supply, Inventory, Demand, and Pump/Rack Prices Table D: Pump Price History - Study Markets Table D: Pump Price History - Study Markets (cont’d) Table E: Ex-tax Pump Price History - Study Markets Table E: Ex-tax Pump Price History - Study Markets (cont’d) Table F: Rack Prices - Study Markets Table F: Rack Prices - Study Markets (cont’d) Table G: Study Market Data - Throughput and Price by Grade Table H: Study Market Data - Rack Price, Tax (by Grade) Table J: Study Market Data - Blended Prices, Costs, Margin Table K: Study Market Data - Sales, Revenue, Outlet Costs, Income Table L: Study Market Data - Demographic Profiles 85 86 88 90 91 92 93 94 95 96 97 98 99 100

III Sources of Information about the Downstream Petroleum Industry____ 101

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.................................................................. 4 Figure 2: 1996 Average Prices/Margins .............................................................................................................................................................................8¢ Pump Price) ............................................ 35 Figure 16: Monthly Demand vs...................... 33 Figure 13: Monthly Gross Marketing Margins.... Income.. 50 Figure 27: Victoria ............................................................................................................................... 46 Figure 23: Average Annual Throughput per Outlet...............................Regional & Urban Groupings.............................................. 34 Figure 14: Canada / US Monthly Pump Price (Nominal $) .................. 57 Figure 31: Winnipeg .......................tax......................................... 32 Figure 12: Monthly Margins 1991-1996 (Nominal $)................................................................................................................................... 58 Figure 32: Toronto ........... Gross Product Margin .............. 28 Figure 8: Outlet Representation by Service ........ 71 MJ ERVIN & ASSOCIATES i ................................................ 45 Figure 22: Petroleum Gross Product Margins ...................................................................................................................................................................Price History.List of Figures Figure 1: Pump Price / Margin Model................... 47 Figure 24: Outlet Volume vs.......................................................................................................Price History .......... 63 Figure 34: Montreal ................ 24 Figure 6: 1995 Retail Outlets by Province ........................Price History...................... 29 Figure 9: Annual Gasoline Price (Cents per Litre) .............................................................................. 54 Figure 29: Calgary ........ 25 Figure 7: Outlet Representation by Mode............ ex-tax elements .............................. 70 Figure 37: Charlottetown .................... 62 Figure 33: Ottawa ............................................................................................................ 40 Figure 18: 1995 Average "Blended" Pump Price ...... 34 Figure 15: Monthly Rack Prices: Selected Markets ...............................Price History .... Costs.....................................................................Selected Centres ..........................................................................Price History ............ 31 Figure 11: Monthly Prices 1990-1996 (Nominal $) ........ 69 Figure 36: Halifax ................................................ 44 Figure 21: Gross Marketing Margin Elements ............................................................................ 56 Figure 30: Regina ..............................Price History......Price History .................... 49 Figure 26: Outlet Revenues........Price History........................................... 53 Figure 28: Vancouver .............................................. 18 Figure 4: 1995 Refined Petroleum Products Demand by Product Category.............Price History ...........................Price History .................................... Pump Price (nominal ¢/litre)...........................................................1988-1995 ................................................................................................................................................ 43 Figure 20: Ex-Tax Pump Price Elements ......................................... 66 Figure 35: Saint John NB ......................................... 48 Figure 25: Outlet / Volume Relationship .................. 24 Figure 5: Canadian Retail Outlet Population ............................... 30 Figure 10: CPI Index Comparison .......................................Regular Unleaded .Selected Goods & Services ...................................................... 16 Figure 3: 1996 Average Regular Gasoline Margins (56........................................................................................ 36 Figure 17: Study Market Methodology ...........Price History........ 42 Figure 19: Pump Price ................

......................................................................... 1996 ......... 39 Table 4: Estimated Cash Flow from Consolidated Net Revenue.. 13 Table 2: Taxes on Regular Gasoline on December 31........................................List of Tables Table 1: Downstream Sales Channels .......... 15 Table 3: Selected Study Markets ...................................................... 51 MJ ERVIN & ASSOCIATES ii ...............................................................................

5 cents per litre on the sale of regular gasoline in a typical major urban market. forms a comprehensive overview of the competitiveness of the downstream petroleum industry in Canada. 1996 Average Prices and Margins .6 ¢ EX-TAX PUMP PRICE RACK PRICE DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT 3. represented by crude. Price competition occurs at three distinct levels in this industry. This Retail Petroleum Markets study provides a practical tool for understanding the dynamics of this vital and complex industry.2 ¢ 24.3 ¢ CRUDE PRICE source: Natural Resources Canada The model shows that in 1996. rack.4 ¢ 19.5 ¢ 0.Executive Summary Study Objectives The Canadian Retail Petroleum Markets Study is a joint initiative of Industry Canada. together with a separate review of the refining sector. the Canadian retail marketing sector realized an average gross product margin of 3. supplier costs and profitability.Regular Gasoline 10 City Average NOT TO SCALE PUMP PRICE 56. Natural Resources Canada (NRCan). These prices are determined in a competitive marketplace. This study. Pump Price/Margin Model The study presents a model which serves to illustrate the interrelationships between the many stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. dealer income. The model also illustrates that each sector margin is defined by the price at which feedstock or wholesale product is bought and then sold. each with unique MJ ERVIN & ASSOCIATES iii . This margin represents gross income (after wholesale product cost and freight costs) available to provide for retail marketing operations including outlet costs.1 ¢ 5. and the Canadian Petroleum Products Institute (CPPI).3 ¢ 28. and a foundation for effective policy development. and ex-tax pump prices.8 ¢ TAX 28.

due to its prominence in the public and media domain. The resultant margins are therefore a reflection of the state of product supply. demand and other competitive factors existing at the time. From 1986 to 1995. Ancillary or non-petroleum revenue is an increasingly important feature of the retail gasoline marketing industry. The Structure of the Retail Petroleum Products Industry Retail petroleum marketing is typified by the retail “gas station” outlet. well over half of all outlets in Canada operate as lessees or independents. and accordingly. this study focuses on the retail gasoline sector.dynamics. and the traditional automotive service bay. car wash. Annual Gasoline Price in Cents per Litre 60¢ Nominal 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Source: NRCan 15¢ 1986 1987 1988 Including Tax Constant $ Excluding Tax Nominal Constant $ 1989 1990 1991 1992 1993 1994 1995 Source: Natural Resources Canada (Nominal $). Approximately 16. Convenience store. ex-tax pump prices declined by 4 cents per litre measured in nominal dollars. the responsibility for deciding upon retail pump prices resides principally at the local dealer level. While each of these marketing channels operates in a competitive environment. Dealers have a variety of relationships with their supplier. nine of the past ten years. are examples of ways in which outlet petroleum sales are augmented by other revenues.000 in 1989. compared to about 22. and declined by 10 cents per litre measured in constant dollars. encompassing several marketing channels which provide a range of petroleum products to industrial and domestic consumers. The Canadian retail gasoline marketing sector is but one element of a much larger industry infrastructure. Statistics Canada (Constant $) MJ ERVIN & ASSOCIATES iv .500 retail outlets were in operation in Canada in 1995. Historical Trends Changes in the average gasoline prices in Canada have remained at or below the “All Items” Consumer Price Index (CPI). which potentially allow for reduced margins at the gasoline pump.

rack) Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 0¢ source: Natural Resources Canada Despite an upwards trend in world crude prices since 1991.The “tax-included” nominal pump price increased over this same period. This has both resulted in. MJ ERVIN & ASSOCIATES v . Regular Gasoline Downstream (Marketing + Refiner) Margin 15¢ 10¢ Refiner Margin (rack . Monthly Margins in Nominal Cents per Litre 30¢ Tax Content 25¢ 20¢ Canada Avg. Canadian average ex-tax pump prices in major markets have been virtually identical to those of the United States since mid-1994. as a consequence of refinery plant rationalization (closures) and a modest demand increase. while (average) combined gross refiner and gross marketing margins decreased by about 7 cents per litre. and has been a result of several factors including: • • • improved refinery utilization and efficiency. improved retail outlet sales performance as a consequence of retail outlet rationalizations and demand increases.crude) 5¢ Marketing Margin (retail . and emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. however. As a result of these trends. both refiners and marketers have experienced a decline in margins as a result of price competition at the rack and at the retail pump. From 1991 to 1996. the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre.

and one by one.Comparison of Canada. which led to two key findings: • Larger population centres and their surrounding communities consistently exhibited lower pump prices and narrower gross product margins than smaller. several “outside variables” (product taxes. This was integrated with selected NRCan price data. proprietary 1995 operating data were collected on a total of 481 retail outlets in the selected market groups. but also had significantly higher throughputs per outlet. This provided for market-bymarket and regional comparisons of key competitiveness indicators. That such a relationship should exist was not surprising. in order to identify market and/or regional competitive differences as potential issues or opportunities within the industry. MJ ERVIN & ASSOCIATES vi . When petroleum gross product margins were compared to their corresponding outlet throughputs. rural markets. A wide range of petroleum gross product margins were evident. 19 markets representing a broad range of conditions. the 19 study markets exhibited a high degree of correlation in gross product margin as a function of outlet throughput. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. were selected for a detailed review of outlet economics. although this study provides an independent confirmation of this. wholesale product cost and freight charges) were isolated from the pump price. to derive 1995 average petroleum gross product margins for each of the 19 markets. With few exceptions. US Monthly Pump Prices 65¢ 60¢ 55¢ 50¢ Price per litre 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Apr-93 Oct-93 Jan-93 Jan-94 Jul-93 US Pump Price (Cdn ¢/l) Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-95 Jan-96 Oct-96 Jul-94 Jul-95 Jul-96 Excluding tax Canada Pump Price US Pump Price (Cdn ¢/l) Including tax Canada Pump Price source: Natural Resources Canada Selected Markets Study As part of this study. With the participation of several CPPI member companies. a distinct pattern was demonstrated: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market.

which represents the source of cash flow for three distinct purposes: • • dealer income/profit: the return or salary to the dealer.000.000.6624 1. Relationship of Gross Product Margin to Outlet Throughput (1995) 18¢ Peace River Thompson Chicoutimi Saint John Charlottetown Gaspé 16¢ Victoria Vancouver White Rock Calgary Regina Winnipeg Ottawa Sault Ste Marie 14¢ 12¢ Sioux Lookout 10¢ 8¢ 6¢ Nanton 4¢ Toronto 2¢ y = -4. not poor competition. revenues from ancillary operations (eg: convenience store. etc. and/or distributed to shareholders.000. head office and regional office overheads. These costs would include salaries of marketing representatives and management.962 R2 = 0.• Smaller markets performed as competitively as larger centres. Consequently.. supplier overhead: all operating costs of the supplier that are not directly associated with a single outlet.000.000 3. and the higher prices (and margins) generally seen in these markets were a function of poor volume performance. • Using market-determined rack prices as the basis for establishing petroleum gross product margin and its related revenue. and in major vs.000 6. This study showed that an average outlet net revenue in the 19-market study group was about $70.000. brand advertising. the residual revenue is available as profit to be re-invested into retail operations. car wash) and outlet costs were factored into the market study analysis to derive a complete measure of average outlet income (in absolute dollars) in each region.000 Halifax Montreal 0¢ source: MJ Ervin & Associates Although a comparison of petroleum gross product margins to their corresponding throughputs was shown to be an effective competitiveness analysis tool. sales processing.000 2.000. of which gross product margin and throughput are only two of several factors. this study estimated that within the 19- MJ ERVIN & ASSOCIATES vii . and his personal labour investment.000. corporate charity. which reflects his investment in the outlet. supplier profit: after the above costs are allocated.000 5.6634Ln(x) + 76. an additional goal of this study was to undertake a comparison of outlet profitabilities.000 Volume (litres) 4. smaller markets.

The study showed that the average urban outlet would experience a net loss without the contribution of ancillary operations. or due to lower nonoutlet overhead costs which are likely achievable by regional and independent marketers.000) $(300.000) $(350. The Canadian retail petroleum products industry.000 per year. respectively.000 $150.000 $200. Average Outlet Income (before marketing overhead costs) BC/PR $300. 1. a variety of available data suggests that a state of vigorous competition exists in the Canadian petroleum marketing sector.000 $($80) ON QU/AT Group A Group B All Study Mkts $(50. but that outlets in smaller (Group B) markets had higher outlet incomes than major (Group A) market outlets . Despite this difference.000) $(100.000) 1: Net Retail Petroleum Revenue 2: Ancillary Revenue 3: Outlet Costs 4: 95 Consolidated Retail Outlet Income source: MJ Ervin & Associates The study also showed that very little fundamental difference in outlet profitability existed between regions. Where the actual corporate results of petroleum marketers showed 1995 profits from their downstream operations.000 vs.000) $(150. was shown to be strongly competitive: MJ ERVIN & ASSOCIATES viii .000 $100.$154. after allowing for estimated dealer profit and supplier overhead. it was likely due to profitability in the refiner side of operations in the case of integrated refiner/marketers. Although an objective measure of competitiveness is elusive.000 $50. at 1995 prices.000 $250.000) $(200. $61. suppliers likely incurred a net loss on outlet operations in 1995. distant outlets are clearly higher than those associated with concentrated urban markets. for which this study had no specific data. by all objective measures available to this study. Conclusions The study findings lead to a number of conclusions relating to the competitiveness of Canada’s petroleum marketing sector. and that petroleum sales revenues alone. were insufficient to cover outlet costs. rural market outlets were likely to be no more profitable: supplier overhead costs associated with maintaining rural.000) $(250.market study group.

A long-term decline in pump prices, when measured in constant and nominal dollars, was observed (Finding 10). This has not simply been a result of a decline in underlying raw materials costs; the very margins within which this industry operates has, over the long term, exhibited a diminishing trend (Finding 13). On a national level, in comparing Canada average (city) pump prices to those of the United States, Canadian prices have been at or below US prices in recent years, when taxes were excluded (Finding 14). In comparing several diverse markets, a consistent pattern of competitiveness emerged when comparing product margins to their associated average outlet throughputs (Finding 18).

These findings are likely in sharp contrast to a common public perception of this industry in general and price trends in particular. Virtually all of the competitiveness indicators examined in this study relate to price. As described in this study however, price is but one of four competitiveness “tools” available to marketers (product, place, and promotions are the other three). Closer examination of these strategic tools might yield additional insights into the nature of competition in this industry sector.

2. The economic relationship of the petroleum marketing sector with its related stakeholders is a complex one.
Critical to the overall success of this study was the development of a model which would create a common frame of reference for the considerable terminology that accompanies an industry as complex as Canada’s petroleum sector. The study presents such a model, which also serves to illustrate the interrelationships between the various stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. This price/margin model illustrates that the various sector margins are a consequence of the prices at which feedstock or wholesale product is bought and then sold (Finding 1). The contrary notion that a given refiner or marketer is free to establish a price based upon a minimum margin requirement, is mistaken. Rack and pump prices are determined in competitive marketplaces, each with unique dynamics. The resultant margins, which at times can decline to very low or even negative values, are thus a reflection of the state of product supply, demand and other competitive factors existing at the time. In applying such a model to the retail petroleum marketing industry, it is important to understand that, while crude oil markets are considered global in scope and rack product markets are considered regional in scope, retail petroleum markets are considered local (municipal) in scope, since this is the effective range of consumer choice. This implies that the competitive dynamics pertaining to these retail markets can, and do, vary considerably from one population centre to another. Dealers were shown to have a variety of relationships with their supplier; well over half of all outlets in Canada operate as lessees or independents, and accordingly, the responsibility for deciding upon retail pump prices was shown to reside principally at the local dealer level (Finding 9).

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While some markets, particularly smaller ones, experienced higher than average pump prices, when the “outside” factors (tax, rack price and freight cost, for example) were rationalized, the resultant margins were found to display a distinct relationship with average outlet throughputs for each market. A much more accurate barometer of industry competitiveness would therefore be the rack-to-retail or gross product margin, measured against the average outlet throughput for that market. This would entail the tracking of not only pump price, but also rack prices and outlet performance, an exercise that consumers are unlikely to engage in, but not beyond the reach of any organization wishing to truly understand petroleum competitiveness issues.

3. Taxation is a significant factor in the price of retail gasoline, and in some markets, presents a competitive disadvantage to Canadian marketers.
This study’s analysis of NRCan urban regular gasoline prices shows that the tax content in a typical consumer’s gasoline purchase is about 50 percent (Finding 4). By contrast, crude costs accounted for roughly 34 percent (Finding 2), refiner margins accounted for 5.3 cents or 9 percent (Finding 5), and product margins accounted for 3.5 cents, or 6 percent (Finding 6) of the 1996 average regular pump price. Petroleum product taxes are levied at the federal, provincial, and in some markets, municipal levels of government. The latter two can vary considerably from one market to another, and are a predominant cause of inter-regional pump price differences (Finding 16). The measurement and analysis of the effect of petroleum taxation levels in Canada compared to other countries is well beyond the scope of this study, but given its magnitude, taxation as an element of public policy is an area worthy of additional research. Due to the localized nature of competition in the retail gasoline marketing sector, taxation differences between Canadian and US markets, or even between Canadian markets with differing tax structures, generally do not serve as competitiveness inhibitors. The demonstrated exception to this is in markets directly adjacent to nearby US markets, but even in such cases, these markets have managed to sustain a certain level of viability and competitiveness. Canadians nevertheless enjoy one of the lowest average gasoline taxes in the industrialized world, second only to the United States.

4. Pump price fluctuations can be an indicator of competition in the marketplace.
Demand for gasoline was shown to vary significantly according to the time of year, in a highly distinct, predictable seasonal pattern. Retail pump prices showed a corresponding seasonal pattern, reflecting consumer demand behavior (Finding 15). This relationship between price and demand was cited as the essence of competitiveness in the petroleum rack marketplace, which in turn is the principal

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driver of ex-tax pump prices. Viewed from this perspective, fluctuating prices are a strong competitiveness indicator (Finding 7). Retail pump price changes showed a close relationship to underlying rack prices, which in turn, showed a close relationship to underlying crude prices (Finding 11). Rack prices were shown to not significantly differ between major centres, further suggesting that a strongly competitive environment exists in the refiner sector as well (Finding 3). While price wars are undoubtedly an indicator of competitiveness, the absence of price war activity does not imply a lack of competitiveness. This study’s marginvolume model could detect no difference between price-volatile markets such as Toronto, and more price-stable markets such as Sioux Lookout, on the basis of price fluctuation alone. In fact, Sioux Lookout, a price-stable market, exhibited competitive traits typical of any of the study markets, when examined on the margin-volume model.

5. Retail gasoline marketing revenues, on a per litre basis, constitute a small portion of the retail pump price.
The pump price/margin model shows that in 1996, the Canadian retail marketing sector realized an average gross margin of 3.5 cents per litre on the sale of regular gasoline in a typical major urban market (Finding 6). This margin represents gross revenue (after wholesale product and freight cost) which, incorporated with ancillary revenues and outlet costs, is available to provide for all retail marketing operations including outlet costs, dealer income, supplier costs and profitability. This consolidated outlet revenue, when distributed these three ways (Finding 20), translates into supplier profits of an estimated one cent per litre of petroleum sales in the case of smaller markets, and a loss in the case of urban markets, which represent the majority of Canada’s population base. While these findings are somewhat qualified in terms of this study’s use of posted rack prices as the derivation basis, it can still be concluded that the petroleum marketing sector constitutes a small portion of the total retail pump revenue distribution.

6. Declining refiner and marketing margins, have caused, and have resulted from, intense competitive pressures in the downstream industry in general, and the marketing sector in particular.
Changing conditions in Canada’s downstream petroleum sector have caused retail pump prices to remain relatively flat since 1992, despite increases in tax content and crude costs (Finding 12), both of which are beyond the direct influence of Canada’s oil companies. A truly objective barometer of downstream industry influence on retail pump price lies in the measurement of margin, not price. Since 1991, the combined downstream (refiner and marketing) margin in Canada decreased by about 7 cents per litre (Finding 13). This trend has both resulted in, and has been a result of, several competitive strategies, including:

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Also. although this study provides comprehensive evidence of this. if Canadian average pump prices were only one cent higher than they were in 1995. had petroleum margins which were commensurate with average outlet throughput for that market. despite the predisposition of many observers to use them as such. virtually all of the 19 study markets exhibited similar levels of competition. based upon an assumed posted rack price. Annual residual profits available to petroleum marketers is in the order of perhaps one cent per litre. regardless of size. not excessive profits. most markets. Although some smaller markets appeared to have higher gross MJ ERVIN & ASSOCIATES xii . Nevertheless. When plotted against the margin-volume model. in the long term these fluctuations are likely more reflective of market restorations. this industry sector would have realized profits of unprecedented proportions.• • • improving production efficiency through refinery plant rationalizations (closures). When these margins were compared to their corresponding outlet throughputs. improving retail outlet performance through outlet rationalizations (closures) resulting in higher unit throughputs (sales volumes). Indeed. A wide range of petroleum gross product margins were evident within the 19market study group. That such a relationship should exist was not surprising. Thus. Outlet throughput is a key determinant of inter-market pump price differences. assuming all other costs were unchanged. Thus. Also. profit margins in this sector can be stated to be in the order of 1 to 2 cents per litre in a “good” year. Thus. It is likely that regional and non-refiner marketers operate with somewhat smaller overhead costs than those used in this study. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. a distinct pattern emerged: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market (Finding 18). 7. crude costs. most outlets used in the 19-market study represent major integrated oil companies. Both the downward trend in margins. Industry profitability is extremely sensitive to very small changes in pump price. and the associated industry initiatives which are ongoing in nature. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. although pump prices in some markets can fluctuate by several cents per litre in the course of a week. serve as perhaps the most significant indicators of competitiveness in the downstream industry. 8. pump price signs are particularly ineffective as a barometer of petroleum marketer competitiveness and profitability. and in turn. these findings clearly show that pump price increases are ultimately linked not to increased profits. While these economics might appear to place this industry in a position of poor viability. but to increases in underlying rack prices. the rack price basis used in this study may understate actual revenues by about 1 to 2 cents per litre.

thereby improving petroleum volumes and ancillary revenues at the remaining sites. Smaller. it would seem that if local government in smaller markets were interested in lowering pump prices. This created some economic pressure to sell product at a higher pump price. MJ ERVIN & ASSOCIATES xiii . isolated markets face particular challenges: although found to be highly competitive. in order to generate sufficient revenue to cover the outlet’s fixed operating costs. A full-serve retail gasoline outlet typically employs 3-5 staff. The costs of most consumer goods in smaller. and therefore suffered an additional distribution cost disadvantage of about 2 cents per litre on average (Finding 17).5 million fewer litres of gasoline than a group A (major centre) station. according to the margin-volume model. • • At first glance. the solution would be to encourage some dealers to exit the market.product margins than larger markets. High distribution costs Smaller markets are generally further removed from their source rack point than larger centres. likely due to the different geographic and lifestyle differences that exist in small communities compared to major cities. other factors exist which contribute to relatively high margins and prices. poor outlet throughputs were generally the predominant factor. • The particular competitiveness and viability issues facing smaller markets is an issue worthy of further study. and this study showed that gasoline prices were no exception. average pump prices were relatively high. This was due to three factors: • Low average outlet throughputs The average group B outlet sold approximately 1. reducing the number of outlets may also reduce the number of competitors. which could actually inhibit competition. The loss of employment represented by a station closure may be of some concern to smaller communities. more isolated markets are generally higher than in larger centres. Low ancillary revenues Outlets in smaller centres received significantly less ancillary revenue than their group A counterparts. there are three points to consider: • • In very small markets. While competitiveness in most smaller markets was shown to be as active as in larger centres. Some impediments to market exit may exist in the form of petroleum underground storage tank regulations which may present to the operator the option of pumping gas as the better alternative to decommissioning the site and possibly incurring prohibitive remediation costs. in order to build upon the findings in this study towards a full understanding of the dynamics at work. In suggesting this approach however. reduce pump prices. 9. which should.

are an acceptable limitation on pure competition (Finding 8). and as such. is well beyond the scope of this study. characterized by narrow product margins and relatively flat pump prices. Ancillary or non-petroleum revenue is described as an increasingly important feature of the retail gasoline marketing demography (Finding 19). Retail ancillary operations are a critical element of petroleum price competition. as marketers find even more innovative ways to attract market share. possibly to the detriment of the consumer. and in turn. is both the cause and consequence of increased activity in ancillary operations. The 19-market study provides some insights into the issue of whether or not regulated retail gasoline markets serve to benefit consumers (Finding 22). Government intervention into petroleum marketing is likely a poor alternative to market-based regulation. and likely others in Nova Scotia. This will be driven by the depressed petroleum product margins which currently exist in the petroleum marketing sector. The historical record is clear however: since deregulating pump prices. has seen a decline in pump prices relative to other Canadian markets.10. direct regulatory interventions may have an adverse effect on competitiveness. and the traditional automotive service bay. the Halifax market. This is not to say that all direct government intervention into marketing practices is certain to produce undesirable results. As these findings show. depressed petroleum revenues. A full analysis of the various features of the Nova Scotia and PEI regulatory structures. car wash. that where a healthy competitive climate exists. This competition then. The federal Competition Bureau for example. Non-petroleum revenues at retail gasoline outlets will continue to gain prominence. were cited as examples of ways in which outlet petroleum sales are augmented by other revenues. under the current PEI regulatory structure. 11. This study proposes rather. many national and local environmental regulations exist for good cause. will likely preserve a highly competitive petroleum market. is viewed as an agency which exists to the benefit of industry and consumer alike. the degree of price competition in the retail petroleum has in effect. Also. Recommendations This study advances two recommendations to enhance the existing competitiveness in Canada’s petroleum marketing sector. does not appear to benefit in consumer terms. and the perceived effect on their markets. as it does in the Canadian petroleum marketing sector. Convenience store. sometimes below that of outlet operating costs. Charlottetown. MJ ERVIN & ASSOCIATES xiv .

Improve public understanding and awareness of competition in the petroleum marketing sector. and the nature of competitiveness influences. in a simple format designed for consumers and legislators. Marketing Strategy Effectiveness: Research into price and non-price marketing strategies and their relative influence on consumer response. Individual companies within the retail petroleum industry have been reluctant to speak directly to the issue of gasoline pricing and competitiveness. and the converse image held in much of the public domain. • • Would this enhance the competitiveness of this sector? It is felt that better public understanding of this industry’s record of competitiveness. 2. Industry and government have an opportunity to continue to work together in cooperative research similar to that which this study represents.1. A regular comprehensive competitiveness evaluation. using Canadian and foreign selected markets. Regulatory Intervention: Historical and theoretical research into government regulation of petroleum markets. not inhibit. This study alludes to several potential study initiatives which go well beyond the objective of public awareness and may assist both the public and private sector policy and strategic directions: • Price/Margin Modelling: Development and adoption of a standard price model and associated terminology by industry/government. A recurrent theme arising from this study’s conclusions is the likely gap that exists between the demonstrably high level of competition within this industry sector. This should be in the form of a quarterly summary of price trends and related measurements. Ways in which this gap can be closed might include: • Ongoing third party evaluation of prices. along the lines of the model used in this study. • • MJ ERVIN & ASSOCIATES xv . Public perception measurement. Develop cooperative industry research into marketing sector competitiveness issues. Research into the specific competitiveness issues of concern to consumers would provide valuable direction for groups conducting industry competitiveness research. Organizations such as the Canadian Petroleum Products Institute and the Petroleum Communication Foundation would therefore have an expanded role to play in commissioning and regularly disseminating the results of these recommended initiatives. margins and competitiveness factors. This study might be used as the concept basis for a comprehensive annual update of price/margin trends and selected market competitiveness research. petroleum marketing competitiveness. using Canadian and foreign selected markets. would ultimately be reflected in carefully-considered public policy which serves to truly enhance.

MJ ERVIN & ASSOCIATES xvi . Lack of understanding of this industry can lead to misguided policies which benefit neither the industry nor the consumer. and issues/opportunities facing such markets. and in particular. and regulators alike. • * * * Better understanding of this industry. by industry. Taxation: An analysis of taxation levels on industry and consumer behavior and as a tool of policy and revenue. is vital if Canadians are to put in place the structures that truly meet their social and economic needs. A better comprehension of the true issues and opportunities facing this industry would be an important step in the right direction towards stable and effective policy.• Small Market Competitiveness: Detailed research into small market outlet economics and competitiveness. consumers. the possible effect of underground storage tank legislation as a potential impediment to market exit and as a competitiveness inhibitor. using Canadian and foreign selected markets.

or even communities within the same region. and regional differences which face the petroleum products retail industry.. face a number of challenges: a poor public image. A working group represented by Natural Resources Canada (NRCan). provide a model for better understanding the nature of competition and pricing economics within the petroleum marketing sector.Introduction Background Canada’s petroleum refining and marketing sectors. Industry Canada completed a Sector Competitiveness Framework (SCF) for the Canadian refined petroleum products (downstream) industry.. and that issues and challenges be identified so that conclusions and recommendations can be made “. Specific purposes of this study would be: • • • • “. and MJ Ervin & Associates was selected to undertake the “rack to retail”. to name a few. and in comparison to the Canadian national average and nearby USA markets”. the Canadian Petroleum Products Institute (CPPI).to better understand the competitive opportunities and challenges.. ... which comprise the “downstream” oil industry.” MJ ERVIN & ASSOCIATES 1 .. more detailed economic model of the industry from the rack price point (eg: the refinery plant) to the retail pump. and a challenging array of potential environmental initiatives. The objective of this project was to improve understanding of the issues affecting the long term competitiveness of this industry. or petroleum marketing portion of the study..to help the industry cope and to enhance competitiveness. and in the process. This would have several advantages: it would objectively explain the sometimes significant pump price differences that can exist between regions. Project Objectives The working group established as the primary objective of this study “. and ..to analyze the rack to retail market and the market structure for refined petroleum products. .to provide a sound database upon which more effective policy decisions can be made. leading to more effective policies and reduced uncertainty for future investment. The SCF laid the foundation for supplementary studies.to draw comparisons with nearby USA markets.to determine the key factors which drive competitiveness in specific markets... competitive pressures from US and offshore refiners. including a regional. and Industry Canada was convened to undertake this project.. region by region across Canada..” An additional study objective was that an assessment of the viability and competitiveness of regional markets be made. In 1995.

Specific comparisons of specific Canadian and US consumer markets were not made.The study meets these objectives. all prices and margins referred to in this document are stated in nominal Canadian dollars or cents (ie: not adjusted for inflation). Acknowledgments Three organizations were of considerable assistance in the development of this study: MJ ERVIN & ASSOCIATES 2 . margins and demand patterns over the past several years. margins and related implications for market competitiveness than can simply be provided by existing public-domain data. Ultimately. Report Format and Conventions • • • • We have defined terms which may be unfamiliar to the reader. it provides a comprehensive tool to understand the dynamics of this vital and complex industry. undertaken as part of this project to: • make a more detailed examination of price. through a multi-faceted approach. presents conclusions and recommendations which arise from the study findings. Findings are stated in bold and are summarized in part E of this report. and in order to provide insights into the range of competitive dynamics that can exist. Part D: Selected Market Study presents the findings of a diverse 19-market study. It also relates consumer demand patterns to pump price fluctuations. Supporting data to these charts can be found in Appendix II. Part B: Retail Structure serves to provide a general overview of the retail gasoline sub-sector in terms of infrastructure. and a foundation for effective policy development. Study Overview This study is in five parts: Part A: Pump Price/margin Model presents a conceptual model for understanding the interrelationship between various subsectors of the petroleum industry. and the effect of competitiveness on each subsector. due to the considerable data gathering difficulties that such an approach would entail. The study does provide comparisons with US markets on a national level of detail. in Appendix I. from which some important findings are made. Part C: Historical Trend Analysis provides an overview of prices. an examination of a diverse array of markets in order to determine the degree of dissimilarity or similarity between them. Unless otherwise stated. or which have a specific meaning in the context of this report. • Part E: Conclusions and Recommendations summarizes the study findings and. Many of the findings in this report are presented in graphical form.

NRCan. Petro-Canada. Finally. and provided critical guidance and feedback at several key stages in the process. Ministère des ressources naturelles du Québec. chaired the steering committee. Consumers Association of Canada. including Ultramar Canada.. for their assistance. These included: Canadian Tire Petroleum. Petro-Canada. several companies made a significant contribution by providing us with retail outlet operating data used in the selected market study. and also participated in the steering committee. assisted in securing the support and participation of member companies in the selected markets phase of the study. facilitated some of the data gathering needs of this study. CPPI.• Industry Canada. Environment Canada. through the involvement of Cindy Christopher and Jack Belletrutti (now with CPPI). Suncor Inc. and Shell Canada. and their 481 retail associates whose outlet data was used in our analysis. Shell Canada. through Maureen Monaghan and Huguette Montcalm.. Suncor Inc. We gratefully acknowledge these companies. The Canadian Petroleum Products Institute. • • Several organizations participated in two key review sessions.. MJ ERVIN & ASSOCIATES 3 . Natural Resources Canada. Ontario Ministry of Environment and Energy.. through Bob Clapp. and Industry Canada. Imperial Oil Ltd.

In fact. principally of motor gasoline. These relationships can be modeled. most Canadians relate to this industry in one specific way: as consumers. The interface between each of the stakeholders in this model is defined primarily in terms of the price at which product is transferred (sold and then bought) from one sector of the industry to its neighboring sector. its price. An Overview of the Model Figure 1: Pump Price / Margin Model NOT TO SCALE PUMP PRICE TAX DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE MJ ERVIN & ASSOCIATES 4 . This price/margin model thus creates a common reference for understanding the economics of retail gasoline. the particular quality of gasoline which is of most interest to consumers is not its colour. pump price changes as displayed on the street sign provide no real insights into the factors which drive competitiveness in this industry. public attention towards the competitiveness of this industry is most focused during a time of gasoline pump price increases. Yet. but simply. as they are in Figure 1. and serves to explain several factors that together determine retail gasoline prices at any given time. as this study shows.which is used by many groups and individuals to assess the competitiveness of the petroleum industry. or taste. texture.price . And. To understand competitiveness and pump price economics in the Canadian retail gasoline sector requires a clear understanding of the interrelationships between the principal stakeholders who ultimately share the revenue from the sale of a litre of gasoline. It is this particular feature of petroleum products .Part A Pump Price/Margin Model Although Canada’s petroleum industry is a vast. unlike many consumer products. multifaceted industry.

Gross margin is simply the difference between two price points. A General Definition of Competitiveness Since understanding and measuring downstream industry competitiveness is a general goal of this study.or margin . but as a dynamic model in constant motion: as competitive forces act to move various price points up and down. The revenue from the consumer purchase of a petroleum product (such as gasoline) is split among four key sectors. margins are squeezed or expanded accordingly. So defined. each essentially taking a share1 . Ultimately however. This section represents the basic model of pump prices and margins shown in Figure 1 not as a fixed view of what pump prices and margins “should be”. consumer perspective. Each margin is quantified by its defining prices. it is important to define the term “margin”. this study examines competitiveness from the latter. “competitive” may be synonymous with “viable”. Before examining each of the model elements. and in fact inextricably related. From an industry perspective. Competitiveness: The Pump Price Model in Motion EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE One of the key questions this study seeks to answer is “Is the gasoline marketing (ie: rack to retail) sector truly competitive?” As there is no standard. typically the retail price (the price at which the product is sold) less the wholesale price (the price a marketer pays for a product). MJ ERVIN & ASSOCIATES 5 . (implying that the stated margin represents net income or “profit”). A consumer however. evaluating competitiveness is therefore a partly subjective process. gross margin represents revenue only. objective measurement for competitiveness.from the total pump revenue. these stakeholder revenues are derived from the revenue from the retail sale. While this term is often associated with the phrase “profit margin”. While both perspectives are valid. any operating expenses must then be considered before making any determination of profits.Many of the terms introduced and explained in this section are used extensively throughout this study. this study’s use of the term relates to gross margin. an understanding of the term itself is necessary. is more likely to equate the term with “value for money”. 1 The revenue from a petroleum sale filters down to the principal stakeholders in various ways.

it can frustrate communication and obscure analysis. In competitive markets the prices of the various competitors inevitably tend toward the same levels because all available cost-savings techniques will be adopted by all the (surviving) competitors. Accordingly. as competitors seek to attract market share through lower prices. Competition can only be sustained therefore. the result of price competition is reduced profit. a universally acceptable definition of competitiveness is elusive. and ideally many entities offer the same or similar products (brand variety). or in other words. To achieve this. and unless care is taken to use the word precisely. this usually requires a reasonable number of competitors. is the only real option in the long term.Competition means therefore an effective functioning of markets which promotes and requires rivalry amongst competitors for the business of consumers. in the sense in which it is something in the public interest.Unlike many business or economic concepts. if market conditions allow a sufficient number of players to remain profitably engaged. and at least one of the competitors wishes to improve its revenue by gaining a larger share of the market (profit motive). Price competition. in order to maintain some level of brand variety.” “. improving efficiencies. any attempt at arriving at an objective measurement of competitiveness would be subject to considerable debate. Simply put. A useful explanation of competition in the petroleum marketplace was advanced by the Restrictive Trade Practices Commission report “Competition in the Canadian Petroleum Industry” in May. The actions by business rivals place an upper limit on the prices a firm can charge for its products. This study therefore attempts simply to identify and illustrate competitiveness indicators which together. 1986: “Competition may mean very different things to different people. They are sources of creative destruction by which monopolies or inefficiencies are destroyed and new entrants and greater efficiency are encouraged. competitors can either restore higher prices or reduce costs. such actions by rivals continuously pressure a firm to lower its costs in order that the highest prices the market will permit it to charge enable it to earn a sufficient return of investment to attract investors. Since a competitive market effectively limits the price option. represents a process by which prices are set. Conditions for a competitive market can be deemed to exist when: • • more than one. Inevitably. and the entry of new competitors and new ideas. Technological change and innovation are the large levers of competition in industry. An effective functioning of markets also permits smaller competitors to expand if they meet the test. This market condition requires that competitors consciously seek to attract business away from each other by price and other means and in turn. one must ask how marketers compete. provide some means for comparing the type and to some extent. More importantly. the degree of competition within a market.. competitive activity can be observed when a competitor alters one or more of MJ ERVIN & ASSOCIATES 6 .” Price Competition in the Oil Industry In order to assess competitiveness. reducing costs..

Price. and in retail markets. Irving. Given the commodity nature of petroleum products. competition acts to self-regulate prices in three distinct marketplaces2: • • in crude oil markets. where retail gasoline dealers compete on a local scale to sell gasoline to the motorist. and a comprehensive description of retail price competition follows: Canada’s Petroleum Industry: Upstream and Downstream The “oil industry” can mean many things to many people.the variables at their disposal. or four P’s: Product. the most effective of these as a competitive tool is price. in turn determined by competition on a continental (Rack Price) or a local (retail pump price) scale. which in turn defines the margins. whose main activity is the exploration and development of crude oil. is false. The dynamics of upstream and refiner competition are major studies in themselves. Basic Marketing: A Managerial Approach. particularly in the crude (upstream) industry and refiner sector.44 (1st Dec.. the geographic scale of competition is an important consideration.: Richard D. and Promotion. MJ ERVIN & ASSOCIATES 7 . Jerome McCarthy. A refiner in Toronto may well compete with a refiner in Buffalo. New York. which in turn defines a proper market price. p. whose main 1 E. It is also important to stress that the market ultimately sets rack and retail pump prices. most Canadians relate more in terms of retail gasoline marketing. Finding 1: Refiner and Marketing Margins are a consequence of their defining prices. • Thus described. Ill. which focuses more on the infrastructure and mechanisms which promote or inhibit competitiveness at the retail level. and are generally known as integrated oil companies. (Homewood. 4th Ed. 1971). but a retail dealer in Toronto is more concerned with the competitive threat posed by other dealers within perhaps a 1 to 2 kilometer radius. and are beyond the scope of this study. Within the broad context of the oil industry. and as will become more evident in this study. where upstream oil producers compete on a global scale to sell crude oil to petroleum refiners. in rack markets. 1960) 2 Although distinct. the “oil industry” consists of two distinct industries: the upstream industry. so a brief description of these. where petroleum refiners compete on a continental scale to sell refined petroleum products (eg: gasoline) to retail marketing organizations. In fact. and the downstream industry. the raw material from which gasoline is made. some organizations have operations in two or more of these markets. Nevertheless. The converse notion that the industry establishes a “should be” margin. commonly known as the “marketing mix”1. Place. While those who reside in oil producing regions such as Alberta often think of the oil industry in terms of crude oil and natural gas exploration and production. competition in the crude and rack markets deserves some mention.

that is to say. as a minor contributor to the world crude supply. Although this industry is not the focus of this study. its marketing operations). Canadian producers have virtually no influence over world crude prices. gasoline grade. Infrastructure The upstream oil industry encompasses a broad range of operations. implying that it fluctuates. which it does on a continuous basis. and refinery production methods. Competitiveness in Crude Markets The nature or extent of price competition in the crude oil marketplace is a subject of considerable debate.activity is the refining of crude oil into petroleum products. from the exploration for potential crude or gas reserves. in several commodities trading centres around the world. Canadian producers are known as “price takers” rather than “price setters” of crude prices. it is important to examine its relationship with its neighboring downstream industry. It is difficult to precisely quantify the upstream “content” in the price of a litre of gasoline. Canadian producers must compete to sell their production to refiners. which finds and produces crude oil . due to variables such as crude quality. Crude oil is a commodity which is traded in a global marketplace. consequently. and in the open market structure that exists in Canada. it is probably sufficient to say that. our crude prices rise and fall according to price benchmarks established far beyond our own shores. and transportation of crude oil to the refinery plant. production. this study uses a fixed percentage of the Edmonton Par crude price as a standard assumption. which gives an accurate portrayal of month-to-month crude price fluctuations. a brief discussion of its relationship with the upstream industry is useful: Upstream Industry CRUDE PRICE UPSTREAM The starting point of the pump price model is commonly referred to as the upstream industry. The upstream industry’s crude price is represented in Figure 1 as elastic. In providing historical comparisons of crude to rack/pump prices. alongside major producing countries such as Saudi Arabia. and the delivery and sale of these products to the consumer. Within the scope of this study. drilling.the raw material from which gasoline is made. MJ ERVIN & ASSOCIATES 8 . rather than a fixed value. While this study focuses on the downstream industry (and in particular.

involving energy. Petroleum Refining DOWNSTREAM MARGIN RACK PRICE REFINER MARGIN CRUDE PRICE Within the downstream oil industry there exists two distinct sectors: refiners. manufactures a range of refined petroleum products including gasolines. This sector acquires crude oil. and some attention to the refiner sector is therefore given here. Some discussion of the interface between refiners and marketers is essential to a full understanding of the marketing function however. diesel. is called the refinery. and from this feedstock. which in oil producing provinces such as Alberta. day-to-day plant operations are cost-intensive. As a general measure: Finding 2: 1996 average crude price. in the petroleum sector. is the provincial government. In addition. heating fuels. buy refined products from the refiner and sell them to the end-use customer. crude is only one of several factors that influence pump prices. Infrastructure The petroleum refiner sector represents the manufacturing stage of the life cycle of petroleum products. Although a description of the process of turning crude oil into gasoline is outside of the scope of this study. as a factor of the regular gasoline retail pump price. A modern refinery is a sophisticated work of engineering. and hopefully realize some production. From this revenue. maintenance. As is typical of many manufacturing organizations. and lubricants. one of the key attributes of this sector is the very high capital cost of a refinery plant facility: roughly one billion dollars in today’s dollars. oil producers must explore for potential reserves. and numerous safety and environmental safeguards. who manufacture petroleum products from crude oil. and marketers who. personnel. The focus of this study is on the marketing sector of the downstream petroleum industry.While some suggest that the price of gasoline should rise and fall exactly with the crude price. or roughly 34 percent of the pump price. drill for. its predominant feature is the plant facility which. and pay out royalties to the resource owner. was 19.1 cents per litre. MJ ERVIN & ASSOCIATES 9 . put simply.

reflecting the cost of transporting the crude from the producing region to the refinery plant. In fact. and a return on the considerable capital investment in the plant facility. not the refiner sector. The existence of rack price in a given market is not of itself.the price charged for immediate supply on an “as available” basis. the relative competitive strength of any given rack market is difficult to assess. the pump price model uses the term “rack price” to refer to the refiner’s sale price of refined petroleum. If for example. this model only uses the benchmark crude value. 1 Dealer Price is not included here. Canadian refiners produced only sufficient product to supply their own networks of retail facilities. refiners sell their product under a variety of arrangements. as they relate to negotiated. Wholesale volume data is not readily available on a market-specific basis. since the market-driven rack price provides an objective. In simple terms. and accordingly. rack prices also exist at many nonrefining centres where there is sufficient wholesale demand for petroleum product. as this price point exists within the marketing sector. 2 MJ ERVIN & ASSOCIATES 10 . representing major Canadian population centres. The Bloomberg Oil Buyers’ Guide™ currently lists twenty Canadian rack points. there would be little or no market-driven competitiveness in the refiner sector.the price charged to a non-refiner marketer (or other sales channel customers) usually under the terms of a long-term supply agreement. which may cause Gross Refiner Margin to be slightly overstated. they use rack price as their basis. On a national basis however. the gross refiner margin is the price at which the refiner sells its refined product. many of which do not have integral refineries. For a competitive rack market to exist. some clear competitiveness indicators exist. Although contract and transfer prices are distinct from rack price. Since both crude and rack prices fluctuate according to market forces. only rack price information is readily available in the public domain. Of these three refiner prices. transfer price . being squeezed or expanded between these two price points. but with no material effect upon the Gross Product Margin derivation. In fact the refiner typically pays a higher price than the benchmark crude price. Contract and transfer prices are not openly shared. a considerable volume of petroleum product must actually trade using rack price as the transaction basis.this is the “internal” price charged by a refiner to the marketing arm of the same company. This margin provides for plant operating costs as described above. which can be broadly categorized as follows1: • • • rack price . Historical data is readily available for crude and rack prices through publications such as Bloomberg Oil Buyers’ Guide™. the gross refiner margin is elastic. For simplicity. less the price at which it bought its raw material2 (rack price minus crude price). While refineries are always rack price points. external measurement of the current market value of a particular petroleum product.Price/Margin Model Elements For simplicity. indicative of a competitive wholesale rack market. confidential terms between the seller and specific buyers. which provides an independent and objective determination of rack-based gross refiner margin. contract price .

and in the case of gasoline. from any one of several regional refiners. who compete for a share of this demand. petrochemical producers. In examining the structure of the Canadian refiner sector. potential sources of wholesale product supply for most Canadian non-refiner marketers. As shown in Figure 15 (page 35). it follows that: Finding 3: The infrastructure of the Canadian refiner sector provides the necessary conditions required for competitive.000 km) for overland truck transport. due to the relatively small transportation cost.for example. arises. and which supply petroleum to about one-third of all retail outlets in Canada1. to major industrial consumers. but where pipeline or marine fuel terminal facilities exist. With a large proportion of the Canadian population within a few hundred kilometers of the United States and/or able to receive marine supply. to so-called “independent” petroleum marketers. In practical terms. or close to. many US and European refineries are in practice. most refiners also participate in the marketing and retailing of petroleum products. in order to maintain realistic accountabilities within each of the two sub-sectors. but at the expense of marketing income. In practice. or transfer price. rack prices are also demonstrably competitive in the sense that there is historically a high degree of price uniformity between any two rack points in North America. even overseas. this limits a marketer to a relatively short range (perhaps 1. Canadian refiners must therefore be price competitive not only with each other. but with their US and European counterparts. The range of potential refiner sources from which a marketer can choose is largely dependent on the transportation costs involved in bringing the product from the refiner’s rack point (ie: the bulk distribution terminal) to the destination market. These independent marketers naturally seek to purchase their product at the lowest available cost (rack price or a negotiated contract price). 1 Based on Octane Magazine Retail Outlet Survey data. who themselves do not refine petroleum products. In these cases of so-called “integrated” refiner-marketers. Integrated Refiner-Marketers In Canada.Competitiveness in the Canadian Rack Marketplace A great deal of Canadian refinery output is sold outside of the refiner’s own marketing infrastructure . MJ ERVIN & ASSOCIATES 11 . integrated refiner-marketers establish transfer prices at. There is no “windfall” profit in setting an unrealistic transfer price: a higher than market transfer price. would produce better than expected refiner income. wholesale refined product is bought and sold across very large distances. as there is no obvious market mechanism to regulate its setting. the question of the internal selling price. The mechanisms that drive rack prices are more fully discussed on page 36. market-driven Rack (wholesale) pricing of petroleum products. market-driven rack prices. for example.

Infrastructure Although most consumers associate petroleum marketing with retail gasoline stations. Within this industry sector. product is sold from a central facility. • • MJ ERVIN & ASSOCIATES 12 . the most recognized element of the downstream oil industry. gasoline price and competitiveness issues attract considerable public. each with its own distinct infrastructure. in the minds of many consumers. trucking. It is this sector which has direct contact with the petroleum consumer and it is this sector. media and regulatory attention. home heating. Marketing operations within this sector can be broadly classified into three elements. For this reason. Retail Sales to the domestic motorist. Direct sales consumers do not use the infrastructure associated with the refiners’ own brand. Product is either delivered to the customer by the supplier’s (or an associate of the supplier’s) tank truck. or in the case of cardlock facilities. including mining. and purchase at or near the established rack price. this is only one (albeit an important one) of several sales channels that exist within the petroleum marketing sector. and who essentially deal directly with the refiner.Petroleum Marketing DOWNSTREAM MARGIN EX-TAX PUMP PRICE RACK PRICE MARKETING MARGIN PRODUCT MARGIN FREIGHT The petroleum marketing sector represents the final stage of the pump price model. and aviation. this study focuses upon price and competitiveness factors that relate to retail gasoline marketing. Wholesale Sales to a wide variety of customers. as a popular and relevant “window” on the petroleum marketing sector. principally into commercial trucking operators’ vehicles. farming. which “sets” the retail price of gasoline. as detailed in Table 1: • Direct Sales to major customers who generally purchase several million litres of petroleum product annually.

usually involving some aspect of the marketing sector infrastructure. These outlets usually have considerable inventory capacity. at a negotiated contract price. The name “cardlock” refers to the coded access card which the customer uses to activate the fuelling pump at the outlet. to the motorist consumer. as discussed. Sales of petroleum products through bulk sales outlets. such as product transport and/or storage. Sales to spot buyers at posted rack price. Sales of aviation fuels at major and secondary airports across Canada. typically at the “rack point”. Sales to commercial and industrial accounts by the wholesale marketing sector. Retail outlets are operated in a variety of modes. as principal elements of petroleum marketing operations.Table 1: Downstream Sales Channels Sales Channel DIRECT SALES Major Industrial Spot Rack Contract Supply WHOLESALE Infrastructure Description Sales to major accounts. one final element of the pump price model must be reviewed. Primary Brand Second Brand Retail gasoline sales through the principal brand name associated with the supplier. to the aviation fuel consumer. Sales of petroleum products (principally gasoline) through retail gasoline outlets. Direct sales generally do not involve any marketing sector infrastructure. Sales of home heating fuels to residential furnace oil customers. Some larger petroleum marketers also operate a network of retail outlets which are identified with a different brand than the primary. using delivery tank trucks. Sales to major industrial accounts. Bulk Sales Home Heating Aviation RETAIL The remainder of this study provides a detailed examination of the retail petroleum products industry in general. and usually supply customers by delivery to the customer’s own storage tank. for example. heating fuel delivery is an integral part of a bulk sales outlet. in smaller centres. which primarily serve long-disttance truckers and commercial delivery and haulage operators. There are over 850 cardlock outlets in Canada. which is generally less than the rack price. There are about 16. according to the contractual relationship between the supplier and the dealer.500 retail gasoline outlets in Canada. Sales to non-refiner petroleum marketers. In major centres dedicated Home Heat centres provide this service. Cardlock Sales of petroleum products through a network of consumer-operated fuel dispensing facilities. and regular gasoline in particular. Before examining this sector in detail. often delivered by pipeline or ship/barge. MJ ERVIN & ASSOCIATES 13 . There are over 1.300 bulk sales outlets in Canada. by delivery tank truck.

Taxation on Petroleum Products PUMP PRICE TAX EX-TAX PUMP PRICE Unlike gross product margin. which amount to 28. for example.3 in Quebec) drop in the tax content. and seven percent GST. typically made up of: • • • • a ten cent per litre federal excise tax. the tax content of the petroleum price is essentially a pre-determined. provincial sales tax. municipal taxes. 1 Due to the application of GST (and in Quebec.2 cent (0. tax content does fluctuate somewhat with pump price changes. The petroleum industry acts as a collector of these taxes. Table 2 shows the provincial tax content for retail gasoline. MJ ERVIN & ASSOCIATES 14 .6 cents per litre (Canada 1996 10-city average). 1995 product taxes on retail gasoline alone represented approximately 9 billion dollars in federal and provincial government revenues. the tax content of retail gasoline in Canada has increased steadily over several years. in a small number of markets. would include a roughly 0. regardless of market conditions. As part C of this study shows. A three-cent drop in pump price. If the pump price decreases for example. PST). or roughly 50 per cent of the pump price. stable amount. this decrease is reflected in a reduced gross product margin the tax content stays essentially the same1.

0 28.3 20.5% sales tax applied to the GST-inclusive pump price.0 15.0 10.1 25. 1996 (City)Province BC (1) Alberta Saskatchewan Manitoba Ontario Quebec (2) New Brunswick Nova Scotia PEI Newfoundland Yukon NWT Canada Ave.1 32. Quebec pump taxes are reduced by varying amounts in certain remote areas and in markets within 20 kilometers of provincial or US borders.0 28.7 13.3 10.7 18.0 10.0 10.5 6.5 14.2 24. MJ ERVIN & ASSOCIATES 15 . Provincial Tax 11.0 10.2 10.6 3.6 25.6 22.0 27.0 10.0 cents is charged in the greater Victoria and Vancouver areas respectively.6 3.5 3.3 27.5 cents and 4.2 cent per litre pump tax.4 3.0 10.7 3.0 10.0 10.Table 2: Taxes on Regular Gasoline on December 31.0 3.5 cents was introduced in the Montreal and surrounding area in 1996.6 3.3 Federal Excise Tax 10. An additional pump tax of 1.0 16.0 10.5 Total Tax 24.8 4.6 3.0 4. plus a 6.0 11.0 GST content (7% of pump) 3.2 24.0 10.8 note 1 note 2 An additional tax of 1.0 14. All Quebec gasoline sales are subject to a 15.5 12.0 10.0 9.0 10.7 30.0 3.9 3.

Refiner operations realized 5. and ancillary operations. This 1 Prices and margins reflect a Canadian 10 city average. to derive a representative value for regular gasoline gross product margin in Canada.1 cents per litre.6 ¢ EX-TAX PUMP PRICE RACK PRICE DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT 3.6 cents per litre.4 ¢ 19. 3. or 9 percent. It also provides an overview of the industry in terms of several infrastructure parameters.3 ¢ 28. Figure 2: 1996 Average Prices/Margins .2 ¢ 24. The residual. or 50.3 percent of the average regular gasoline posted pump price. and the retail gasoline sub-sector in particular. and potentially. Figure 2 integrates the pump price model with NRCan 1996 regular gasoline product prices (10-city average). based on regular unleaded gasoline. the brand supplier’s costs. was available for product marketing operations.1 ¢ 5.5 ¢ 0. some profit return for the shareholder. or 34 percent of the pump price. Upstream operations realized 19. namely the dealer’s costs and income. operating modes. MJ ERVIN & ASSOCIATES 16 .Part B The Structure of the Retail Petroleum Products Sub-Sector While part A of this report established a conceptual framework of Canada’s petroleum industry. including retail outlet distribution.5 cents per litre (after freight cost). Pump Price/Margin Model: An Integrated View Having reviewed each of the four key pump price/margin model elements. this section provides a view of the Canadian petroleum marketing sector.8 ¢ TAX 28.3 cents per litre.Regular Unleaded1 NOT TO SCALE PUMP PRICE 56.3 ¢ CRUDE PRICE source: Natural Resources Canada • • • • Tax accounted for 28.

or “rack to retail” margin. and rack price. Bloomberg rack price values were used as the assumed wholesale price. Finding 6: Marketing Sector Overview DOWNSTREAM MARGIN EX-TAX PUMP PRICE RACK PRICE MARKETING MARGIN PRODUCT MARGIN FREIGHT Once the refiner has completed its work. was 3. was 5. it falls into the domain of the marketing sector. is usually the gas station. for example) is sold/transferred at the current rack or transfer price. Freight MJ ERVIN & ASSOCIATES 17 . Both refiner and marketing margins have been in decline over the past several years. three key findings can be stated: Finding 4: Finding 5: In 1996.3 cents per litre. See page 10 for further explanation. this is seen as a “non-core” business. Based on the 1996 data. The gross marketing margin. In referring to marketing margins and product margins. Freight cost does not typically fluctuate. the average Gross Product Margin available to Canadian petroleum marketers to provide for all operating costs and profits on the sale of regular gasoline in a typical urban market. It is this sector which provides the entire infrastructure for bringing refined petroleum products from the refinery plant facility to the ultimate end-use consumer. In 1996. As the product leaves the refinery plant. and is often out-sourced to third-party common carriers. the finished product (gasoline. as part C will describe. petroleum taxes accounted for 50. and is then transported to the retail outlet. Although many petroleum marketers conduct their own freight operations. This margin represents the revenue which provides for two key operations: • Freight: Freight (or distribution) is the transportation of petroleum products from the rack or refinery point to the final point of sale. The marketing sector then. In 1996.5 cents per litre.3 percent of the average urban price of regular gasoline in Canada. the average Gross Refiner Margin available to Canadian petroleum refiners to provide for all operating costs and profits on the manufacture of regular gasoline. is the second of two elements of the downstream oil industry. and it is depicted in Figure 1 as a fixed cost element. which in the case of retail gasoline.gross product margin represented 6 percent of the Canadian average regular gasoline pump price. is defined by the marketdriven price points of ex-tax pump price.

Unlike most other retail enterprises however.000 per outlet.6¢ Refiner Operations 5.1¢ Tax 28. which are typically close to a wholesale rack point. This is a particularly useful measurement in comparing retail gasoline markets. and is therefore a poor comparative tool. but at an average cost of over $200. incur a variety of costs. an average gross product margin for regular gasoline in a major Canadian city was 3.3¢ source: Natural Resources Canada The determination and comparison of gross product margins in selected markets is a key objective of part D of this study.8¢ Pump Price) Upstream Operations 19.5 cents per litre in 1996. petroleum marketers. rural markets experience higher pump prices than do larger centres. Modern pump and underground tank installations have greatly reduced the environmental and safety concerns associated with petroleum products. As represented in Figure 3. • Product sales: Within this domain. storing and dispensing a product such as gasoline adds considerably to the operating cost. Posted pump price includes all of these variables. typical of any retail business. and upstream/refiner margins. but can be as high as 3 to 4 cents in markets more distant from the refinery point: this partially explains why some small. as it excludes the “outside variables” of tax.5¢ Product Operations Freight 0. freight. as it represents 80% of all retail gasoline sales. Midgrade and premium grades (which have a higher octane content) represent 5% and 15% of MJ ERVIN & ASSOCIATES 18 .costs are generally less than one-half cent per litre in most major Canadian cities. Grade Differentials Most of the Canada average product prices cited in this study refer to regular unleaded gasoline (RUL). together with gas station dealers.3¢ 3. Gross product margin is therefore defined as gross marketing margin less freight cost. Figure 3: 1996 Average Regular Gasoline Margins (56.

Place. or when comparing price levels between markets. Prices for midgrade and premium grades are established in the same way as RUL prices: through competitive activity. and confines itself to the more specific (and popular) issue of brand competition for retail gasoline. Environmental concerns and associated costs have dictated greater selectivity in developing new sites. Specific competitiveness indicators relating to product would be: • • • introduction and promotion of gasoline grade features such as octane content. • Product In the past decade. 2 E. commonly known as the “marketing mix2. competitive strategy of this type focuses heavily on selecting the best place. etc. This study does not examine such a broad issue however. additives. Although revenue from this product is factored into the study market economics in Part D. a number of factors preclude this type of strategy.).retail gasoline sales respectively1. as gas stations proliferated. Competitiveness in the Retail Gasoline Sub-Sector Retail Competitive Practices and Indicators A retail gasoline marketer competes at many levels: At a general level. Higher octane grades are more expensive than RUL. Irving. The grade differential varies somewhat from city to city. A portion of the market certainly responds to this type of competitive strategy.44 (1st Dec. marketers have attempted with some success to differentiate their product offerings from other brands. Simply put. This has resulted in a decline in the number of retail outlets in the past two decades (Figure 5. rather than the most places. and accordingly. Basic Marketing: A Managerial Approach. will ultimately purchase based on price. (Homewood. it represents a very small percentage of total retail petroleum sales. seasonal blends. and Promotion. Today. p.. propane vs. but in 1995 was typically 5 cents per litre for midgrade. marketers compete to be represented in as many and/or the best locations as possible. Today. one must ask how marketers compete. In order to measure competitiveness. 1960) MJ ERVIN & ASSOCIATES 19 . page 24). and the price difference between these grades and the RUL price is referred to as the grade differential. expanded product/services offerings such as convenience items. 1971). 4th Ed. competitive activity can be observed when a marketer alters one or more of the variables at their disposal. Place Typically. Jerome McCarthy.” or four P’s: Product. Price competition has forced marketers to optimize outlet revenue. gasoline). RUL prices are therefore most often cited when relating historical price trends. but most consumers view gasoline as a commodity. In the 1960’s and 1970’s this type of competitive activity was evident in the retail gasoline sector. 1 Diesel is another petroleum product sold at many retail outlets. marketers compete for the consumer’s choice of transportation energy (for example.: Richard D. Ill. Examples of competitiveness relating to place include: • opening new or upgrading existing facilities. and 9 cents per litre for premium gasoline. Price.

volatile pricing manifests itself in the form of a price war (see below). price clearly remains the predominant competitive tool used by Canadian gasoline marketers. In this context. This study presents an extensive historical and comparative analysis of pump prices. promotion strategies generally attempt to provide the consumer with added value without resorting to pump price reductions. As such. uniform prices . free item with purchase or special price item with purchase. Promotional activity seems to have decreased in the past few years. • Price In most markets. probably due to its relatively high cost. price has proven to be the most widely used competitive tool by gasoline marketers. Price Uniformity and Volatility As the degree of price uniformity and volatility in the retail gasoline sub-sector is often perceived as synonymous with its competitiveness. MJ ERVIN & ASSOCIATES 20 . Examples are: • prominently displayed prices . caused by price competition. This study therefore focuses on the nature of product price as a measure of competitiveness in the Canadian “rack to retail” sector. this study examines the dynamics of price competition in considerable detail. Examples of promotional competition are: • • • brand identity gasoline discount coupon. • • • While examples of all of these indicators are abundantly in evidence. gasoline is a commodity.while uniform pump prices are sometimes cited as evidence of industry collusion. gasoline is viewed by consumers as a commodity uniform in quality and widely available. Promotion In the gasoline retailing sub-sector. is less clear. and therefore “trades” within a relatively narrow price range. it is useful to address some of the general competitive mechanisms behind these particular competitiveness indicators.that pump prices are almost universally displayed on highly visible outlet billboards is indicative of the importance of price as a key selling feature.contrary to some public perception. Consequently. due to the largely commodity nature of petroleum product. At its extreme. volatile prices . fluctuating pump prices are a significant indicator of robust competition among marketers. and more importantly. Establishing an objective measurement of price as a competitiveness indicator however. and due to the already slim margins available to marketers. in fact it is indicative of some consumer perception that one brand of gasoline is essentially the same as the next. low prices and/or margins. their subsector margins.• • closure of non-viable outlets.

This is a misconception. but to competitors. for example).When pump prices are uniform. obviously at the expense of the supplier margin. A common factor in both falling and rising prices is the posted price sign: it is this device that instantaneously communicates pump prices not only to consumers. 1 This does not occur at company operated or commission outlets. competitors may not follow. one must adopt the perspectives of both consumers and competing. and gasoline is perhaps the only consumer product in Canada that is so consistently advertised in this way. it is often cited as evidence that marketers engage in direct communication to “fix” prices at an agreed-to level. There have been examples of this margin being squeezed to a point that is insufficient to cover operating costs. If one dealer decides to reduce pump prices (by two cents. When this occurs. MJ ERVIN & ASSOCIATES 21 . competitors will likely match this price. assuming that the rack price is unchanged. But if the pump price increase is a reasonable reflection of the underlying change in gross product margin. adjacent dealers. the wholesale rack price. since they too must restore their gross product margins to sustainable levels. In the case of lessee or independent dealers however. the supplier may temporarily intervene. Pump price signs are an ubiquitous feature of the retail gasoline industry. its effect is to restore some measure of the dealer margin. who then react quickly to the change. since there is no “dealer margin”. Whether through falling pump prices or rising rack prices. The effect of this upon the gross marketing margin is obvious: it is squeezed. While this support may take one of several forms. are indicators of a competitive market. there are times (during a price war in particular) when the retail pump price may fall to a level that provides the dealer with an insufficient margin1 to meet operating costs.where the ex-tax pump price is equal to. the relationship between the supplier and dealer is generally as described on page 25. The other dealer has little choice but to quickly match. facilitated through street price signs. the effect on many consumers is immediate: they will drive into that station. in order to maintain a reasonable market share. and provide to the dealer what is commonly referred to as price support. in an attempt to gain market share. Pump prices therefore tend to move uniformly within a very short time. This price lowering mechanism may sometimes result in a “price war” if each competitor continues to undercut the other. To understand the phenomenon of uniform pump prices. If the posted price increase is too high. or even being squeezed to zero . or when prices rise or fall apparently in unison. or even less than. One of these competitors will be forced to make a difficult decision: to be the first to raise pump prices in order to restore gross product margins to a viable level. or even undercut the competitor’s lower price. gross product margin will eventually diminish to a point that is not viable for a majority of competitors. Price Support In times of “normal” pump prices. Finding 7: Price uniformity and price volatility. bypassing the higherpriced outlet.

These cases have largely involved local dealers and/or isolated incidents. More recently. Quebec has recently passed legislation which prohibits the selling of (retail) gasoline or diesel at a price which is lower than the (wholesale) cost to a retailer in any trading “zone”. Price maintenance: where a supplier exerts upward influence on prices upon a dealer. Following a year-long investigation. control over retail pump price effectively reverts to the supplier. There are few current examples of direct government intervention in the pricing of petroleum products. in the past twenty-five years the Bureau has prosecuted a total of 11 violations within the Canadian retail gasoline sector. Price discrimination: where a supplier charges different prices to competitors in the same market who purchase similar volumes of products. Nova Scotia market may provide an example of the potential negative consequences of direct intervention. the Bureau investigated four well-publicised allegations of anti-competitive behavior on the part of major oil companies in the spring and summer of 1996. and a brief discussion of this case appears in part D. Price Competition and the Regulatory Process All retail competitiveness in Canada comes under the purview of the Competition Act. which is administered by the federal Competition Bureau (Industry Canada). however. resulting in 9 convictions.Under the provisions of some price support mechanisms. While this study does not intend to undertake a detailed review of the effect of the Act. Perhaps the most notable of these was the 1986 Restrictive Trade Practices Commission (RPTC) study “Competition in the Canadian Petroleum Industry”. An examination of the effect of the Competition Act. The Bureau enforces provisions of the Act which prohibit: • • • • Abuse of dominant position: where a firm (or several firms in collaboration) uses its market power to lessen competition. is beyond this study’s scope. the petroleum marketing sector has been the subject of several inquiries at federal. most with the general mandate of examining the “fairness” of competition and pump pricing among petroleum marketers. In addition. In addition. Conspiracy: where several competitors act to fix prices for the purpose of reducing competition. Prince Edward Island is the only province which directly regulates gasoline and fuel oil prices. The outcome of the RPTC study can generally be characterized as acknowledging that a healthy state of competition exists in this industry. but reverts back to the dealer when the support arrangement is ceased. or of direct government intervention in marketing. provincial and even municipal levels. 1997 MJ ERVIN & ASSOCIATES 22 . A review of historical retail pump prices in the Halifax. the Bureau found that there was no evidence to support these allegations1. 1 Competition Bureau press release “Gasoline enquiries find no evidence of anti-competitive behavior” dated March 18.

This may have the effect of reducing volume and revenue potential at other retail sites in the vicinity. creates an obstacle to. to some degree. As a product group however. exit from an non-viable market. So defined. The high cost of building a modern retail gasoline outlet for example. Retail gasoline sales. particularly in smaller population centres. Finding 8: Some competitiveness inhibitors may exist in the retail gasoline market which are regulatory in nature. and is the single largest market for gasoline products. accounting for roughly 88% of all gasoline demand. sales of gasoline through the roughly 16. in the form of standards for the decommissioning of retail petroleum sites. accounting for 41% of all petroleum demand.Competitiveness Factors (Drivers and Inhibitors) Competitiveness factors can be defined as those forces which act upon the industry to increase (drive) or decrease (inhibit) competitive practices. for safety and environmental protection. a consequence of regulations which stipulate minimum standards for the design and construction of petroleum storage tanks. is in part. improves or reduces a “level playing field” in terms of the ability of one market to compete with another on the basis of price or operating costs. entry into an attractive market. These regulations clearly exist to the benefit of all. This issue is discussed more fully in part D. promotes or limits market-driven pump prices. policy or regulation can be deemed to be a competitive factor if it: • • • • creates an obstacle to. and at least some of this capital cost is regulatory compliance-driven. but exist to meet other important societal needs. creating a need for higher margins. Many smaller retail owner-operators. as outlined above. and consequently. A practice. accounts for about 37% of all refined petroleum demand in Canada. MJ ERVIN & ASSOCIATES 23 . or incentive for. a competitive climate.500 retail gasoline outlets across Canada. Retail Gasoline Demand Gasoline is but one of many products produced by the Canadian downstream industry (Figure 4). it is clear that government policy plays an important role in facilitating. It is important to acknowledge that many regulations affecting the retail gasoline industry. that is. or incentive for. inhibit competition. may find it more attractive to continue operating a marginally viable gasoline outlet than facing the cost associated with the removal of inactive tanks and/or potentially contaminated soil. it is the single largest one. or inhibiting. one can cite examples of regulatory obstacles to exit from the retail gasoline market. higher pump prices. Conversely. but the considerable investment represented by a modern retail outlet has the effect of limiting market entry to those with sufficient capital to put at risk.

452 Million Litres source: Statistics Canada (Cat# 45-004) National Retail Petroleum Outlet Representation The most frequent source of information on the population of retail gasoline outlets in Canada is the Octane Magazine Annual Retail Survey. nor is there any federal or uniform provincial enumeration of retail gasoline outlets.Figure 4: 1995 Refined Petroleum Products Demand by Product Category Naptha/Avgas/ Stove/Kero 6.6% Other Gasoline 4.9% PetroChem Feedstocks 5.7% Light/Heavy FuelOils 14.it has no practical means to enumerate each and every outlet. Figure 5: Canadian Retail Outlet Population .7% Lube/Grease 1.1988-1995 24000 22000 Estimate of Actual Outlet Population 20000 Octane Magazine Survey 18000 16000 14000 1988 1989 1990 1991 1992 1993 1994 1995 source: Octane Magazine (estimate by MJ Ervin & Associates) MJ ERVIN & ASSOCIATES 24 . This study provides an estimate of the actual retail outlet population. as shown in Figure 5.3% Total Sales Volume: 84.2% Asphalt/Coke 4. This survey accounts only for major established retail networks .9% Diesel Fuel 22.2% Other 0.2% Propane /Butane 2.2% Retail Gasoline 37.

500 in 1995. Figure 6: 1995 Retail Outlets by Province PE 136 Northern Canada 65 576 NF 711 657 NS NB QU 3777 1610 BC 1716 AB SK 911 MB ON 3631 Total = 14.513 723 source: Octane Magazine Retail Petroleum Outlet Modes The retail gasoline marketing infrastructure is much more complex than represented in Figure 1. to about 16. using Octane counts only) is roughly equivalent to population densities. exist between retail dealers and their suppliers. Several possible relationships. who manages the day-to-day operations at the retail outlet. Company Operated MARKETING MARGIN PRODUCT MARGIN = BRAND SUPPLIER MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE In this mode. There are two main stakeholders involved in the marketing of retail gasoline: the supplier. the retail outlet is owned and operated entirely by the product supplier. Company Operated outlets have no MJ ERVIN & ASSOCIATES 25 . The principal dealer and attendants are salaried employees of the supplier. as owner of the product. and this is of some importance with respect to the matter of prices and competition in this sector. Distribution of these outlets by province (Figure 6. as one might expect.000 outlets in 1989. controls the setting of the pump price. and usually owns the brand name seen at the retail outlet. who holds initial title to the refined petroleum as it leaves the rack point. or modes.The estimated number of retail outlets in Canada has declined from 22. and all inventory and revenues belong to the supplier. and the dealer. The supplier.

Control of Pump Price Dealer Compensation supplier a commission from the supplier. an employee of the supplier supplier supplier typically the dealer.the entire gross product margin accrues to the brand supplier. the outlet facilities and petroleum inventory is owned by the supplier. who may pay the supplier a lease fee for the use of merchandising space 26% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Lessee EX-TAX PUMP PRICE MARKETING MARGIN PRODUCTDEALER MARGIN MARGIN BRAND SUPPLIER MARGIN FREIGHT DEALER PRICE RACK PRICE In the lessee mode. Since the supplier owns the petroleum product at this type of outlet. The dealer in turn hires attendants. but the outlet operator (“dealer”) is compensated by a commission payment. who pays all outlet operating costs. The lessee purchases petroleum MJ ERVIN & ASSOCIATES 26 . and pays them from his commission revenue. based on pump sales volume. the supplier typically owns/controls the principal outlet facility which in turn is leased out to the dealer or lessee. supplier salary from supplier. the “dealer” is actually an employee of the supplier supplier supplier typically the supplier 15% Control of Pump Price Dealer Compensation Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Commission Operator MARKETING MARGIN PRODUCTCOMMISSION EXPENSE MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE In this mode. usually based on cents per litre of petroleum sales. the supplier retains control of the retail pump price.sub-component margins . The “dealer” is in essence.

and has control over the retail pump price. can vary considerably from one supplier to another. and sells at the posted pump price. dealer-established retail price. and means of compensation supplier. Control of Pump Price Dealer Compensation lessee lessee buys product from the supplier. who would typically charge a lease fee to the dealer for the use of the facility lessee typically the lessee. and sells at the posted pump price. less the Dealer (wholesale) Price charged by the brand supplier. The distribution of retail outlets by mode has some important implications concerning the nature of gasoline pricing and competition. Control of Pump Price Dealer Compensation dealer dealer buys product from the supplier. The margin between these two prices is the dealer’s gross revenue. This Dealer Price. and in turn resells to the motorist consumer at a higher pump price established by the lessee. not the supplier. unlike rack or pump prices. since it is predicated on contractual arrangements between the dealer and the supplier. The dealer buys the petroleum product at a Dealer Wholesale price and in turn resells to the motorist consumer at a higher.product from the supplier at a “Dealer Wholesale” price. MJ ERVIN & ASSOCIATES 27 . The dealer pays most or all of the expenses associated with operating the outlet. The margin between these two prices is the dealer’s gross revenue. who may pay the supplier a lease fee for the use of merchandising space 14% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Independent Dealer EX-TAX PUMP PRICE MARKETING MARGIN PRODUCTDEALER MARGIN MARGIN BRAND SUPPLIER MARGIN FREIGHT DEALER PRICE RACK PRICE In this mode. This dealer margin is defined as the pump price (ex-tax). and means of compensation dealer dealer dealer 45% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Lessee or Independent outlets are the only modes in which a true dealer margin exists. the retail facilities are owned by the dealer.

during a price war) as previously described. virtually none of the major integrated outlets are company operated. who themselves establish pump prices. Petro-Canada. some general figures are mentioned here. 1 Unless the dealer is under a price support arrangement (for instance. MJ ERVIN & ASSOCIATES 28 . This is significant: dealers who operate as lessees or independents are directly responsible for deciding upon the retail pump price. The remainder represent one of over 50 different marketer organizations. and fully two-thirds operate as lessees or independents. In addition. It follows that pump prices tend to be somewhat more directly controlled (ie: at the local community level) in smaller markets than in larger markets.Figure 7 shows that of all retail outlets in Canada less than half operate as company or commission dealers. Roughly half of all retail outlets in Canada represent a major integrated oil company (Shell. Figure 7: Outlet Representation by Mode 16000 14000 12000 10000 8000 6000 4000 2000 0 Total outlets Major integrated Others 2235 3821 Company Operated Commission Dealer Lessee Independent 2022 9 2061 1059 Company Op 2226 1760 963 2298 6435 4137 source: Octane Magazine Outlet Throughput A key measure of outlet performance and viability in the downstream industry is the monthly or annual outlet throughput of petroleum products. This further limits the direct influence that a major oil company might have upon the Canadian retail marketplace. There is some evidence that there is a higher percentage of lessee and independent outlets in smaller markets than in large population centres. Therefore: Finding 9: Pump prices are established by the local dealer at over half of all retail outlets in Canada1. or Imperial Oil). While a complete discussion of average throughputs in typical Canadian markets will take place in part D of this study. It therefore follows that no single oil company has a position of absolute dominance over the Canadian retail gasoline sector.

the revenue from so-called ancillary services is an increasingly essential element of retail gasoline marketing. Based on a sampling of outlets surveyed in this study.While an average outlet throughput may be in the order of 2. feature both a large-area convenience food store and a modern car wash facility. In fact. The proliferation over the past two decades of ancillary services such as convenience stores and car washes. Figure 8: Outlet Representation by Service 4000 3000 2000 1000 0 Car Wash CStore Kiosk Propane Service Bays source: Octane Magazine MJ ERVIN & ASSOCIATES 29 . has had a profound effect on the retail gasoline marketing sector. Ancillary Services Very few if any retail gasoline outlets limit their product offerings simply to gasoline. Canadian throughputs have dramatically improved in the past several years . average annual throughputs ranged from under 1 million litres in smaller population centres. Many outlets have more than one ancillary offering: many “flagship” outlets for example. These improved outlet throughputs have provided for improved petroleum revenue potential. and is a result of. which in part has led to a reduction in retail product margins. reduced petroleum margins. Improved outlet revenue from ancillary operations has caused.a result of significant retail outlet rationalizations (see Figure 5) which the petroleum products industry has undertaken. to over five million litres in major markets such as Toronto. Figure 8 depicts the Canadian representation of several key ancillary services. these study findings show that this can vary widely from market to market. ancillary service has had the consequence of subsidizing the pump price of gasoline.5 million litres. more fully described in part C. In effect. Most ancillary services are operated by the dealer/lessee. who may pay the supplier (who is typically the owner of the facility) a lease or franchise fee for the use of the retail space.

the “Canada average” price reflects an average of urban markets only1. an examination of the specific historical record of gasoline prices is useful. An “all markets” average.Part C Historical Trend Analysis This part of the study examines several historical price and margin trends in the Canadian retail gasoline sector. and with which the reader should be familiar. Since 1 Data is not regularly collected on smaller markets. including smaller markets. as can be seen in part D of this study. This shows that pump prices have increased in nominal terms. when the Persian Gulf War caused crude prices to increase significantly. Since rising prices are common to most consumer goods and services. mainly using Canada average values. would be somewhat higher. using a Canada 10city weighted (by provincial demand) average. in nominal (actual) and constant (inflation adjusted) dollars from 1986 to 1995. particularly around 1990. While some of the presented findings are selfexplanatory. Unless noted. This part examines broad trends in several areas. Regional and market-to-market comparisons are presented in greater detail in part D. many utilize terms which are explained in part A. Gasoline and the Consumer Price Index A common perception among consumers is that gasoline prices are steadily rising. Figure 9: Annual Gasoline Price (Cents per Litre) 60¢ Nominal 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Source: NRCan 15¢ 1986 1987 1988 Including Tax Constant $ Excluding Tax Nominal Constant $ 1989 1990 1991 1992 1993 1994 1995 source: Natural Resources Canada / Statistics Canada Figure 9 shows the Canadian 10-city average regular gasoline pump price. As such. MJ ERVIN & ASSOCIATES 30 . prices are for regular unleaded (RUL) gasoline.

1986 = 100 Source: Statistics Canada Cat 62-010 Domestic Water Domestic Electricity Alcoholic Beverages Auto Repairs All Items Gasoline Fuel Oil Food Natural Gas Telephone Service source: Statistics Canada Key Price History Figure 11 depicts the history of Canada (10-city) monthly average regular gasoline pump prices. there appears to be little or no lead or lag in the timing of rack price fluctuations relative to crude price changes. Several observations can be made from this: • • • • fluctuations in average rack prices have closely followed changes in underlying crude costs. rack price. as defined in part A of this study. Finding 10: Gasoline has remained at or below the “all items” Consumer Price Index nine out of the past ten years. ex-tax equivalent prices. as in Figure 10. nominal pump prices decreased. fluctuations in average pump prices (ex-tax) have closely followed changes in underlying rack prices. When pump prices are reduced by the amount of tax content. and there appears to be no lead or lag in the timing of pump price fluctuations relative to rack price changes. and relative crude cost. Figure 10: CPI Index Comparison . It also depicts the associated margins. retail pump prices were about 7 cents less in 1995 than they were in 1986. In constant dollars. both nominal and constant dollar prices are less in 1995 than in 1986: the constant dollar price of gasoline declined by 10 cents per litre from 1986 to 1995. When compared to other consumer goods. MJ ERVIN & ASSOCIATES 31 .1990. gasoline prices have had a mitigating effect on the Consumer Price Index (commonly referred to as the CPI or inflation rate).Selected Goods & Services 180 170 160 150 140 130 120 110 100 90 80 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Gulf War pushes crude oil prices upwards in 1990-91 Annual Averages.

and have risen slightly since 1994. Figure 12 shows that industry margins have not been constant over time. as the next section shows. as Figure 11 shows. the presence of these additional market factors have operated to the benefit of consumers. If. and in fact have displayed a declining trend over the past six years. as might be suggested. which are defined by the price points.Figure 11: Monthly Prices 1990-1996 (Nominal $) 70¢ Pump Price (Canada Average) 60¢ 50¢ Cents per Litre Pump Price excluding tax Tax Content 40¢ Rack Price (Canada Avg) Downstream Margin 30¢ Marketing Margin 20¢ Refiner Margin Crude Price 10¢ Jul-90 Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jul-96 source: Natural Resources Canada From these observations. as shown in Figure 12. nor do rack prices exactly follow crude costs. then one might expect margins to be quite constant over time. are principally a reflection of changes in the underlying price of crude oil. due to additional market factors which affect pump and rack prices at any given point in time. This recent rise in pump prices is attributable to two factors: • • the rise in crude costs in this period. it is also useful to examine the behavior of margins. Margin History While Figure 11 provides an indication of key price trends. It is important to state that pump price changes do not occur in exact lock-step with rack prices. In fact. the downstream industry operates on a “cost-plus” basis. From Figure 11 it can be seen that urban retail pump prices declined somewhat from 1991 to 1994. it simply passes on a fixed cost margin to determine the “correct” pump price. MJ ERVIN & ASSOCIATES 32 . and the rise in the tax content. the following is evident that: Finding 11: Retail pump price trends are principally a reflection of changes in the underlying rack (wholesale) price of petroleum products. which in turn. that is.

the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre. the actual fluctuation is much more pronounced than shown. Regular Gasoline Downstream (Marketing + Refiner) Margin 15¢ 10¢ Refiner Margin (rack . several factors. A more thorough discussion of specific market factors for these and other centres appears in part D. the gross marketing margin can fluctuate quite significantly1. including: • • • improved refinery efficiency as a consequence of plant rationalization and a modest demand increase. as local competitive factors act to self-regulate pump prices. 1 In fact. since the chart is based on monthly averages. Figure 13 is a comparison of regular gasoline gross marketing margins from 1991 to 1996 for selected centres.crude) 5¢ Marketing Margin (retail . Finding 13: From 1991 to 1996. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. this upward trend is not attributable to “downstream” refiner or marketing sector margins. while average combined Gross Refiner and Gross Marketing Margins decreased by about 7 cents per litre.rack) Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 0¢ source: Natural Resources Canada Finding 12: Retail pump price increases from 1994 to 1996 are wholly attributable to increases in petroleum product taxation and crude costs.Figure 12: Monthly Margins 1991-1996 (Nominal $) 30¢ Tax Content 25¢ 20¢ Canada Avg. improved retail outlet performance as a consequence of higher throughputs due to outlet rationalizations (closures) and demand increases. compared to the Canadian average. The decline in refiner and marketing margins has both resulted in. MJ ERVIN & ASSOCIATES 33 . This shows that on a monthly basis. which have both shown a consistent decline throughout the period 1991 to 1996. not weekly or daily data. In particular. and has been a result of.

US Price History The retail gasoline tax structure in Canada is vastly different than the US. Figure 14: Canada / US Monthly Pump Price (Nominal $) 65¢ 60¢ 55¢ 50¢ Price per litre 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Apr-93 Oct-93 Jan-93 Jan-94 Jul-93 US Pump Price (Cdn ¢/l) Apr-94 Apr-95 Apr-96 Oct-94 Oct-95 Jan-95 Jan-96 Oct-96 Jul-94 Jul-95 Jul-96 Excluding tax Canada Pump Price US Pump Price (Cdn ¢/l) Including tax Canada Pump Price source: Natural Resources Canada MJ ERVIN & ASSOCIATES 34 . This shows that. although Canadian pump prices in urban markets are clearly higher than in the US. for several years.Figure 13: Monthly Gross Marketing Margins. On an ex-tax basis. is presented in Figure 14. This difference accounts for most. Canadian pump prices have been roughly equal to. US pump prices. if not all of the difference in pump prices between Canada and the US.Selected Centres 16¢ HALIFAX Canada Average 12¢ Price per litre 8¢ 4¢ 0¢ CALGARY TORONTO HALIFAX Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 (4¢) source: Natural Resources Canada (pump price inputs) & Bloomberg OBG (rack price inputs) Canada vs. or even less than. this is wholly attributable to the difference in taxation. resulting in significantly higher Canadian gasoline prices. with and without tax. A comparison of Canadian and US regular gasoline pump prices.

as a result of outlet closures (see Figure 5. both a cause and an effect of improved throughputs and ancillary revenues as previously described.Finding 14: Canadian retail gasoline pump prices are the competitive equal to those of the US. The introduction of Reformulated Gasolines (RFG) into some US markets has caused prices to rise. which is reflected in US average pump prices. page 24) and somewhat increased demand. While these trends have also occurred in the US. behave in a very similar fashion. Canadian ex-tax pump prices were historically somewhat higher than in the US. largely as a result of two factors: • Canadian marketing margins have decreased in this period. Canadian consumers do not experience any retail gasoline pump price disadvantage to their US counterparts. Canadian outlet throughputs (although likely still less than those of the US). This is no longer the case however. Rack Price History The behavior of rack or wholesale prices provides an indication of the degree of competition among refiners. • Although this study shows that on an ex-tax basis. and moving up or down more or less in unison. when compared on an ex-tax basis. This would be a useful area for further research. Prior to 1994. Figure 15: Monthly Rack Prices: Selected Markets 31¢ 29¢ TORONTO SEATTLE (Cdn ¢/l) 27¢ VANCOUVER WINNIPEG Price per litre 25¢ 23¢ 21¢ BUFFALO (Cdn ¢/l) 19¢ 17¢ 15¢ Jul 93 Jul 94 Jul 95 Apr 93 Apr 94 Apr 95 Jan 93 Jan 94 Jan 95 Jan 96 Oct 93 Oct 94 Oct 95 Apr 96 Jul 96 source: Bloomberg Oil Buyers’ Guide / Natural Resources Canada MJ ERVIN & ASSOCIATES Oct 96 35 . have improved considerably. From this it can be seen that Canadian and US rack prices. RFG has not been introduced to Canadian markets. Figure 15 compares these values for selected Canadian and US centres over a period of several years. trading at any given time within a relatively narrow (about 2 cents per litre) range. there are likely some differences in the competitive dynamics in US markets compared to Canadian markets.

100. As non-refiner marketers attempt to secure a supply of this diminishing inventory.300.000 2. any given Canadian or US rack point cannot successfully price its wholesale product substantially higher than that of any other rack market in continental North America. or sales. Simply put. To do so would invite the inevitable consequence of rack customers themselves sourcing their product needs from the rack point that offers the lowest price (plus freight expense).500. Yet in the latter half of each year. as demand ebbs and inventory improves. Gasoline price exhibits a similar. a “buyers market” develops. conditions begin to favour a “seller’s market”. Such a pattern is sometimes perceived as evidence of refiner or supplier “price gouging”. the price tends to be bid upwards.000 1.000 Jan-91 14¢ Jan-92 Jan-93 Jan-94 Jan-95 Ex-tax Pump Price (Canada avg.000 2. Gasoline demand exhibits a very regular seasonal pattern.500.700. Demand vs. or indeed anywhere. Price History Figure 16 shows the history of Canadian gasoline demand.700.900.000 2.100.000 34¢ 2. albeit less distinct pattern.000 24¢ 1.000 2.That Canadian rack prices are so closely tied to those of the US is strong evidence of the interdependence of these two macro-markets. rising and falling closely in step with demand. and falling in the latter half of each year.900. compared to average ex-tax regular gasoline pump price for the same period. Figure 16: Monthly Demand vs. and as would be expected in any commodities market under these conditions. This phenomenon actually illustrates the essence of how competition in the petroleum industry operates to self-regulate the price of gasoline: The rising demand for gasoline which occurs every spring has a diminishing effect on product inventories. not only in a given market.000 1. increasing significantly every spring. per litre) 12 Month Moving Average 19¢ 29¢ 44¢ Monthly Demand ('000's litres) 39¢ source: Statistics Canada (demand) / Natural Resources Canada (price) MJ ERVIN & ASSOCIATES 36 . of motor gasolines from 1991 to 1996. and prices tend to fall. Pump Price (nominal ¢/litre) 3. but in fact across the North American continent (US demand follows a similar pattern).

in that prices have fallen. which ensures a competitive product price for buyer and seller alike. the essence of a free market economy. MJ ERVIN & ASSOCIATES 37 . a feature of most marketregulated commerce. their related product costs and margins.Whether in the spring or the fall. On a long-term basis however. despite a rise in demand. Figure 16 shows that from 1991 to 1995. The next part of this study will undertake a comparative perspective: examining pump price and margin differences that exist between individual markets within Canada. while average ex-tax pump price declined by 14% (since 1994. has operated in a highly competitive environment. so do prices. Finding 15: Seasonal fluctuations in retail pump prices are ultimately linked to wholesale product inventory levels. and it can be seen to operate as effectively in the Canadian petroleum products industry as it does in any open market.3%. This part of the study presented a number of historical views of retail gasoline prices. gasoline prices have not followed the traditional model. All of the findings suggest that. and product taxes which add to the consumer price of gasoline. price fluctuations at the rack (and consequently at the pump) are a simple reflection of buyers and sellers alike. pump prices have increased due to a significant rise in crude costs in this period). This is of course. while world crude prices and Canadian taxes have generally increased over the past several years. which consists of the refiners and marketers of gasoline and other petroleum products. The traditional supply-demand model predicts that when demand rises. as evidenced by declining industry margins. demand rose approximately 8. and this is clearly demonstrated in the case of gasoline prices on a seasonal basis. competing to meet their own needs. the downstream petroleum industry.

namely product margin. These “outside factors” tend to obscure the more relevant aspect of pump price. etc. Part D of the study therefore has two main objectives: • an examination of a diverse array of markets in order to determine the degree of similarity or dissimilarity between them. there is no regular monitoring of pump prices in smaller centres. play a role in a market’s pump price. A number of factors such as taxes. which relates solely to that sector of the petroleum industry directly involved in using pump price as a competitive tool. ancillary revenues. margins and related implications for market competitiveness than can simply be provided by existing public-domain data. and a more detailed examination of price. although one was subsequently dropped due to insufficient submitted data. Nineteen markets were therefore adopted for the study (Table 3). and in order to provide insights into the range of competitive dynamics that may exist. MJ ERVIN & ASSOCIATES 38 . so that a broad range of the following criteria was represented: • • • • • population proximity to refinery proximity to primary supply point proximity to US border proximity to other retail markets Twenty markets were initially selected by the committee. • Methodology Selection of Markets A number of markets were selected for the study. but contains two inherent limitations: • • data is drawn exclusively from major Canadian centres. is useful in providing broad overviews of industry price and margin trends. outlet volumes. outlet costs. freight..Part D Selected Markets Study Introduction A review of public domain data on current and historical prices as presented in part C. and pump prices alone provide very little opportunity for “comparability”.

retail pump prices . but a number of variables. retail outlet and brand representation. these organizations provided market-level data on freight costs.are influenced not by one. Shell Canada. the gross marketing margin must be examined in isolation from those other variables. 2 Depending upon the outlet mode. This study compiled both sets of financial data in order to produce a net revenue/cost per outlet picture which eliminated the effect of mode differences.000. and Canadian Tire Petroleum. To examine the competitiveness of the marketing.Each market was classified according to regional affiliation (BC/Prairie. both the dealer and the product/brand supplier realize revenue and incur costs associated with an outlet. its situation in the Greater Vancouver Regional District placed it in the category of a Group A market. Process Overview As illustrated in part A.0001. and Group B markets less than 500. it was essential to obtain data not normally available through existing public sources. the gross marketing 1 Although White Rock is clearly not a major centre by itself. Furthermore. confidential data were collected and independently evaluated on 481 retail gasoline outlets in 19 Canadian markets. Table 3: Selected Study Markets Total (19) Group A (8) BC/PR (9) Vancouver* Victoria White Rock Calgary* Winnipeg ON(4) Toronto Ottawa* QU/AT (6) Montreal* Group B (11) Nanton AB Peace River AB Regina* Thompson MB Sault Ste Marie* Sioux Lookout Chicoutimi* Gaspé Saint John NB* Charlottetown Halifax * forms part of ancillary revenue and cost analysis Sources of Data In order to conduct a detailed study market analysis of retail marketing operations. To this end.and consequently competitiveness . and Quebec/Atlantic) and market size: Group A markets included population centres in excess of 500. In all. or “rack to retail” sector. In addition.. Ontario. member companies of the Canadian Petroleum Products Institute (CPPI) were approached to provide detailed outlet operating petroleum and ancillary revenue and cost data2 for a random sampling of outlets in each of the selected study markets. Five companies responded to this request: Imperial Oil. price history data not available through public sources. MJ ERVIN & ASSOCIATES 39 . and for smaller markets. Suncor Inc. Petro-Canada.

Where differences in gross product margin might still exist. The variables of tax content. 2. including some smaller centres. Where applicable. Values were weighted by market population using 1991 Statistics Canada census data in order to determine Group A (major urban). and freight. by product grade. weighted by sales demand. Using the derived gross product margins and volumes for each market. and the final “rationalized” gross product margin was determined for each market. this study postulates that average outlet throughput in each market may be a significant factor affecting margins and prices. From participant company supplied data. average outlet annual throughput was determined for each market. the study postulates that outlet operating costs and revenues from ancillary sources (such as convenience store sales) might affect how the dealer establishes competitive pump prices. Process Description Figure 17 shows an overview of the process used to reduce the study market 1995 pump prices into its sub-elements: Figure 17: Study Market Methodology PUMP PRICE 1 EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE FREIGHT TAX OUTLET VOLUME 3 PRODUCT MARGIN 5 REFINER MARGIN UPSTREAM 2 6 7 DEALER PROFIT MARKETING COSTS MARKETING PROFIT ANCILLARY REVENUE PETROLEUM REVENUE PER OUTLET OUTLET COSTS 4 PETROLEUM REVENUE PER OUTLET CONSOLIDATED NET INCOME PER OUTLET OUTLET COSTS 1. a broad representation of markets was possible. and freight were successively removed from the pump price. 3. 1 Although outlet cost and ancillary revenue data was not available for all markets. Finally. This allows for an accurate determination of net outlet revenue. For each market.margin is stripped of its freight component. The gross product margin thus serves as an interim basis for comparing study markets. average pump prices are higher than actual average regular gasoline prices. Group B (smaller market) and 19-market study averages. rack price. MJ ERVIN & ASSOCIATES 40 . these were weighted by volume. to arrive at “blended” values2. Gross product margins are therefore compared to corresponding volumes to determine if a cause-and-effect relationship exists. 2 Accordingly. as the “blended” price includes other product grades. tax content. rack price. a market-by-market profile of outlet income is presented. in addition to operating cost and ancillary revenue data gathered in the study1. to derive the 1995 average gross product margin for each of the study markets. 1995 average values were determined for pump price.

or consolidated net incomes. product margins.to determine average consolidated net revenue per outlet. While clear.4. Rack prices used in this study are taken from Bloomberg Oil Buyers’ Guide™.. Supplier Overhead costs..7 million. average revenues from ancillary services were added. 6. Interpretation of Data In some smaller centres. MJ ERVIN & ASSOCIATES 41 . as described on page 10. Wholesale refined product prices used in this study are therefore likely to be overstated. including relatively smaller ones such as Sioux Lookout or Gaspé. and therefore where assumptions were made. . Bloomberg rack price values were used as the assumed wholesale price. also considering that RUL constitutes the majority of product. etc. Use of Rack Price The derived value of retail gross product margin is essentially based upon two price points: pump price and rack price. In referring to marketing margins. objective data exist for both of these values. represent a broad range of markets. This variation is constant across all nineteen markets however. many wholesale petroleum purchases are made at less than the “posted” rack price. Also.. the effect on the “blended price” is small. but they are relatively minor. 7. the Bloomberg rack price is used as the defining wholesale price point which differentiates between the refiner and marketing sectors. A dollar-per-outlet estimate of these elements was made. and from one brand to another. perhaps by 1 to 2 cents per litre.. the rack price basis results in petroleum revenues which are understated to a somewhat greater degree in high throughput markets than they are in low throughput markets. and outlet operating costs were deducted from total revenue. grade differentials were based on known differentials of nearby markets. 5. and supplier profit. petroleum revenues. These differentials do vary from one market to another. these 19 markets represent a combined population base of 8. marketing margin. When these margins are applied to outlet throughputs as in step 4 above. and accordingly represent a broad spectrum of consumers and marketers. The resultant consolidated net revenue per outlet was examined in terms of its component elements of Dealer Income. From participant company data. so that on a cents-per-litre basis. Since actual wholesale prices (using transfer or contract prices) are not available in the public domain. and gross product margins are therefore likely to be understated. The derived weighted average values of pump price. encompassing a significant portion of the entire Canadian market. freight. Unlike retail pump prices however. a recognized source of data on world crude oil and petroleum markets and prices. This value was then applied to the gross product margin to determine average outlet petroleum revenue.. it is important to understand that the use of rack price in this analysis has certain implications. accurate comparisons are possible.

Study Market Findings Posted Pump Price Figure 18 shows 1995 average retail pump price (using a “blend” of gasoline and diesel grades) for each of the 19 study markets. The data also shows that typically. accurate.Rack prices used in this study are nevertheless market-driven.38 cents per litre in ex-tax pump price. but a variance of only 12.8 cent difference in pump price 1 See footnote at Appendix II. and based on objective. higher priced markets are associated with smaller population centres. there is little to suggest why such a high variance exists. Tax Figure 19 shows posted pump prices for the study markets. broken into tax and extax components. while lower prices tended to prevail in major centres. The 19-market study group exhibited a statistical variance1 of 17. The data shows a statistical pump price variance of over 17 cents per litre within this study group. and these tend to interfere with an objective comparison of fundamental competitive differences which may exist.64 cents per litre in pump price. The first of these variables to be examined is tax. Figure 18: 1995 Average "Blended" Pump Price 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ Price per Litre 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River On the basis of posted pump prices. Several variables beyond the control of the retail gasoline sector are incorporated into the pump price however. A 6. independently gathered data. MJ ERVIN & ASSOCIATES 42 . table J for an explanation of how variance is derived. The study data suggests that variations in tax rates account for a significant part of pump price differences.

or when examining historical price trends. the resultant ex-tax pump price nevertheless represents a gross margin for the entire oil industry. 1 Due to pump price differences.75 cents per litre (Vancouver. accounting for roughly half of the average retail price.less than one-half cent per litre. Average 1995 taxation within the study group ranged from 22 cents per litre (Nanton) to 28. Montreal). In all study markets. As this study seeks to isolate the marketing or “rack to retail” sector as a competitive entity. Since the level of taxation is clearly a factor which is beyond the control of the petroleum industry. namely the upstream industry and refiner sector. it is therefore more useful to use ex-tax pump prices when comparing any two markets. This eliminates any effect that tax variability may have. ex-tax elements 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ Cents per litre 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River 95 Blended Tax 95 Blended Extax Price Finding 16: Provincial differences in product taxation are a predominant cause of inter-regional pump price differences. as described in part A. provincial tax rates can vary greatly. additional elements of the revenue stream must be further isolated. The data shows that taxation between markets within the same province varies little. taxes were a significant element of pump price. Upstream and Gross Refiner Margins Although the deduction of tax content is useful.while all markets are subject to the same rate of federal excise tax and GST1.between Calgary and Vancouver for example. MJ ERVIN & ASSOCIATES 43 . but the variance is minimal . thus providing a better basis for comparison. when examined on an ex-tax basis.tax. Figure 19: Pump Price . while taxation between provinces is more pronounced . was less than three cents. GST content can vary by market.

This is due to the fact that for any market. Figure 20 shows ex-tax pump price isolated into its upstream/refiner (ie. Freight costs are additional. in the case of Thompson). if a clear understanding is to be achieved. reflecting the reality that at the rack level of competition. the dynamics of (marketing) retail pump prices are quite distinct from those of (refiner) rack prices. rack and pump prices. it should be restated that each of these sectors. the rack price is set at the rack point (Winnipeg. and therefore are best analyzed separately. To address this. reflecting some differences in refinery crude acquisition costs.Since the refiner’s rack price incorporates the raw material cost (crude price) plus the “value-added” element of refining. one region cannot maintain rack prices at a higher level than another. MJ ERVIN & ASSOCIATES Cents per litre 44 . the validity of analyzing gross marketing margins in isolation might be raised. the resultant gross marketing margin represents that portion of the pump price model which relates solely to the retail marketing sector. The figure shows that combined gross Refiner/upstream margins are relatively uniform among the study group. the rack price is equivalent to the upstream margin plus the refiner’s margin. as this would cause rack buyers to bring product in from the lower-priced region . It can also be seen that upstream/refiner margins for remotely located markets such as Thompson MB. are clearly delineated by market-driven crude. rack price) and gross marketing margin elements. and their respective margins. When rack price is deducted from the ex-tax pump price. differ little from those of major centres. Figure 20: Ex-Tax Pump Price Elements 40¢ 95 Retail Marketing Margin 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River 95 Blended Rack Price As many petroleum marketers are also involved in crude oil production and product refining.assuming transport costs did not outweigh the price difference. as is examined below. but ultimately. Furthermore.

generally smaller markets. For markets which are also established as rack points. Before using this as an analytical tool however. this freight cost is almost negligible. it is essentially a “non-core” business.3 cents per litre. Finding 17: Market-specific differences in product freight are a key factor in inter-market ex-tax pump price differences. Two of the study markets had freight costs in excess of 3. particularly in comparisons of major urban markets to small. For other. Figure 21 shows a study market comparison of gross marketing margins. and therefore a significant pump price factor. in fact. with their component freight costs. remote population centres. most Canadian marketers contract out at least some of its product distribution needs to third party cartage companies. Although freight operations are often an integral part of many petroleum marketing operations.0 cents per litre. one final outside variable must be isolated: that of product freight. It is axiomatic that remote markets incur higher freight costs than those located close to the source of supply. the data shows that freight is often a significant part of the gross marketing margin. To provide a comparative view of the marketing dynamics within the study group.49 cents per litre (gross product margin). it is therefore important to eliminate the freight variable from the gross marketing margin. as low as 0. resulting in comparative gross product margins. MJ ERVIN & ASSOCIATES 45 .16 cents per litre (gross marketing margin) to 7.Gross Marketing Margin and Freight Cost The gross marketing margin provides for a useful comparison of revenue streams available to the retail gasoline marketing sector. Figure 21: Gross Marketing Margin Elements 20¢ 15¢ Freight Cost 95 Retail Product Margin 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River Elimination of the freight variable reduced the study group’s statistical variance from 13.

6. was the lowest. Bloomberg rack price values were used as the assumed wholesale price. whereas the study market result cited here incorporates all gasoline grades and a broad variety of population centres.95 cents per litre. or between any two regions. while Group B markets averaged 7.5 cent per litre average relates to regular gasoline in major markets. Group A (larger population) markets averaged 5. MJ ERVIN & ASSOCIATES 46 . In referring to marketing margins.68 cents per litre1.06 cents per litre. petroleum revenues. at 14. 1995 gross product margin averaged 5. Gaspé.5 cents per litre average Gross Product Margin cited in Part B. Figure 22: Petroleum Gross Product Margins 70¢ 60¢ 95 Retail Product Margin 95 Blended Pump Price 50¢ 40¢ 30¢ 20¢ 10¢ 0¢ Victoria Vancouver White Rock Winnipeg Calgary Nanton Regina Toronto Ottawa Sioux Lookout Chicoutimi Saint John Thompson Peace River Montreal Halifax Gaspé Sault Ste Marie Charlottetown When comparing the variance in pump prices within the 19-market study group (17. as the 3.22 cents per litre Smaller markets showed a wider variance in gross product margin . which suggests that there may be an additional factor which is responsible for pump price 1 This is considerably more than the 3. or consolidated net incomes. was the highest of the study group.5 cents). at 3. A 7. For all study markets.the gross revenue available to the petroleum marketing sector for its operations.42 cents per litre. it is evident that the non-industry factors of taxation and freight cost are partly responsible for pump price differences between any two markets.17 cents per litre. The study revealed that: • • Retail gross product margins differ very little between major urban markets . to the resultant retail gross product margin . product margins.Retail Gross Product Margin Figure 22 provides a comparison of the original pump price for each study market. while Toronto.5 cent variance in gross product margin is still significant however.a variance of only 2.68 cents per litre.6 cents) to the variance in their component gross product margins (7.

000 5. a wide range of variability still exists between markets in the study group .000. an examination of related outlet throughput volumes is necessary.000.000 2.000 4. This study’s data shows that the range of volume performance among outlets within a given market is relatively narrow. vs. if any retail gasoline outlet located in the Toronto area for example. sold significantly less than 5 million litres of petroleum per year. To understand why such a wide range of margins can exist after eliminating all tax and freight variables.000.000 Litres 3. Indeed.2 cents per litre in Gaspé. it would likely be so unprofitable as to be un-viable. a distinct relationship between product margin and outlet throughput emerges: MJ ERVIN & ASSOCIATES 47 . A wide range of volume performance is evident. once isolating retail gross product margin from all of the “outside” pump price factors.000 1.differences between markets.000.000. If these two factors are related to each other as they are in Figure 24.000 0 Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River Relationship of Gross Product Margin to Outlet Throughput Figure 22 shows that.000 litres per year (Sioux Lookout) to over 5. ranging from under 700.1 cents per litre in Toronto.000.000 litres per year (Toronto). Figure 23 shows a similarly wide range of variability in average throughput per retail outlet within these same markets.000. for example.14. Outlet Throughput Figure 23 shows average annual outlet throughput (sales volume) for the study group. Figure 23: Average Annual Throughput per Outlet 6. 3.

000 Volume (litres) 4.000. As most outlet operating cost are fixed in nature . not of poor competition.000.that is.Figure 24: Outlet Volume vs.000 6. It can be seen from Figure 25 that major centres (Group A) generally experience smaller retail gross product margins (5.a low volume outlet would be much less profitable than one in the same market with significantly higher volumes. Ontario. This analysis of outlet throughput and gross product margin by market leads to one of the more significant findings of the study: Finding 18: After accounting for differences in taxation and freight the remaining difference in retail pump prices between markets is very closely linked to market differences in average sales volumes such that markets with low Gross Product Margins are associated with high outlet throughput volumes. the 19 study markets exhibit a high degree of uniformity of gross product margin as a function of outlet throughput. while those with high Gross Product Margins tend to have low outlet throughputs. Smaller markets perform as competitively as larger centres.000 2. Gross Product Margin 18¢ Peace River Thompson Chicoutimi Saint John Charlottetown Victoria Vancouver White Rock Calgary Regina Winnipeg Ottawa Sault Ste Marie 16¢ 14¢ 12¢ Gaspé Sioux Lookout 10¢ 8¢ 6¢ Nanton 4¢ Toronto 2¢ y = -4.7 million respectively.95 cents).000 3. On average however.000.42 cents) than smaller (Group B) population centres (7. they remain essentially the same regardless of volume changes . Although MJ ERVIN & ASSOCIATES 48 . an outlet with low throughput would derive less petroleum revenue than a high-volume outlet. all market groups (BC/Prairie.000 5.4 million litres annually. If all outlets in a given market experience generally low throughputs. With few exceptions.962 R2 = 0. and the higher prices (and margins) generally seen in these markets were a function of poor volume performance. compared to 2.000 Halifax Montreal 0¢ That such a relationship would exist is understandable: with the same margin.000. and Quebec/Atlantic) exhibit a close adherence to expected margins based on throughput. it follows that higher gross product margins will be the consequence.000.6624 1. the Group A market outlets had roughly 50% more throughput than Group B outlets .6634Ln(x) + 76.000. Regionally.

while operating costs are those costs which are directly incurred in the operation of the retail facility.000 4. averaged $69.000. two additional factors are introduced: ancillary revenue and outlet operating costs.000.000.000 Volume (litres) The examination of gross product margin as a function of outlet throughput provides a comprehensive and objective rationalization of inter-market pump price differences. and ultimately shows that very little difference in competitiveness exists between any two markets. however. Ancillary revenues are those derived from non-petroleum sales sources.000. and must be examined. Gross product margin.Regional & Urban Groupings 18¢ 16¢ 14¢ 12¢ 10¢ 8¢ Group B markets QU/AT markets BC/PR markets Group A markets Ontario markets All study markets 6¢ 4¢ 2¢ 0¢ 1.000 6. ancillary sales. Consolidated Net Revenue per Outlet To create a complete. and incur many expenses in the course of their commerce. and supplier MJ ERVIN & ASSOCIATES 49 . supplement their incomes with other revenues. less outlet costs.000 2. competitiveness occurs between retail outlets. These additional factors clearly have an effect on the relative competitiveness of retail markets. outlet-based view of retail markets. is only a measure of petroleum revenue per litre. and the resultant consolidated net revenue. It represents the residual revenue which is available to the dealer and to the supplier. this is likely due to the higher incidence of Group B study markets within this region. supplier overhead costs.the revenue available for dealer income. Figure 26 summarizes total outlet petroleum sales.000.Quebec/Atlantic markets appear to experience higher margins (and smaller throughputs) than other regions.000. as described below. in addition to petroleum sales. and auto service. which for the study group.000 5. car wash. Consolidated net revenue is the result of combining gross petroleum revenue (gross product margin times throughput) plus ancillary revenue (excluding cost of merchandise). Figure 25: Outlet / Volume Relationship . In reality.716 .000 3. which. such as convenience stores. product cost.

000) $(200.000) $(250. consolidated net revenue is the residual revenue which is available to the dealer and to the supplier. An examination of these component elements reveals a significant finding: that for most markets. Although outlets in smaller (Group B) markets had higher outlet consolidated net revenues than major market outlets .000) $(150.000 $($80) ON QU/AT Group A Group B All Study Mkts $(50. Figure 26: Outlet Revenues. reduced pump prices. A discussion of the ultimate distribution of this revenue is useful.000) $(100. Income BC/PR $300.$154. petroleum sales revenues alone were insufficient to cover operating costs for the 481 individual outlets studied. Most markets showed relatively similar net revenues (see Appendix II. Costs. MJ ERVIN & ASSOCIATES 50 . which reflects his investment in the outlet. $60. Table K). In effect. Finding 19: Based on published rack prices. The study average retail gasoline outlet would have experienced a net loss without the contribution of ancillary operations.000) $(300.000 $50. petroleum revenues alone are insufficient to offset the operating expenses associated with retail petroleum outlets. although these differences are somewhat overstated (market data for Montreal showed particularly low net revenue. and his personal labour investment.000 $200.000) 1: Net Retail Petroleum Revenue 2: Ancillary Revenue 3: Outlet Costs 4: 95 Consolidated Retail Outlet Income The findings depict that some inter-regional differences in outlet net revenue exist. As described above. these ancillary operations contributed to a lower product margin and consequently. as explained below.000 vs.000 $250.Group B outlets were not as profitable as these revenue values might suggest.000 $100.000) $(350.000 per year respectively . causing the weighted average for Quebec / Atlantic to be depressed).000 $150. Dealer and Supplier Profitability Consolidated net revenue represents the source of cash flow for three distinct purposes: • dealer income/profit: the return or salary to the dealer.profits.

supplier overhead: all operating costs of the supplier that are not directly associated with a single outlet. These costs would include salaries of marketing representatives and management, brand advertising, corporate charity, sales processing, head office and regional office overheads, etc.. supplier profit: after the above costs are allocated, the residual revenue is available as profit to be re-invested into retail operations, and/or distributed to shareholders.

Although ideally, this study would quantify each of these values, there are no clear, objective means to do so. In particular, the measurement and subsequent allocation of supplier overhead costs on an outlet-by-outlet basis is an inexact science, at best. This study therefore provides an estimate of these values, as shown in Table 4.

Table 4: Estimated Cash Flow from Consolidated Net Revenue
All Study Market Avg. Consolidated Revenue (data supported) comprised of (estimated): Dealer Income Supplier non-outlet Overhead Supplier Residual Profit $32,000 $52,000 $(14,000) 0 to $60,000 $30,000 to $70,000 $(30,000) to $150,000 $70,000 Estimated Range ($15,000) to $220,000

note Supplier overhead estimates are based on MJ Ervin & Associates research data not directly related to this study.

Despite the fact that these table values are estimates, the values, and the supplier residual profits in particular, are believed to be a reasonable assessment of the state of retail profitability in Canadian retail petroleum markets. Accordingly, in 1995, a typical retail outlet is estimated to have returned a net loss to the supplier in the order of $14,000, using Bloomberg rack prices as the cost basis. Finding 20: For the 481 individual outlets studied, after the average 1995 outlet revenues were distributed to meet dealer income and the supplier’s marketing overhead requirements, the residual represented a net loss to the supplier. Taking into account the possible discounts from posted rack prices and independent brands’ lower marketing overheads, residuals for outlets not studied may be better. This may contradict other indications that 1995 in fact may have represented a profitable year for Canada’s major oil companies. This was unlikely to be as a result of retail marketing operations, however, and was more likely a result of other operations including upstream, refining, or petrochemicals. Also, non-refiner marketers, who did not contribute to the study database, may have realized somewhat better profitabilities than indicated here: it is likely that their dealer costs and supplier overheads are less than those of major oil companies. Nevertheless, this data illustrates an important finding:

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Finding 21: Based on published rack prices and the individual outlet data, the profitability of the 481 outlets studied appears only marginal. The viability of the Canadian retail gasoline sector as a whole may be somewhat better, given the possibility of discounts from posted rack prices and potentially lower overhead costs. Unlike the major market outlets, rural market outlets used in this study appeared to be somewhat more profitable. This may not be representative of rural outlets in general, however, since the 11 Group B markets were chosen for this study for some particular criteria, not necessarily to be “typical” small-population markets.

Market by Market Competitive Analysis
This section of the study provides a detailed market-by-market analysis of the 19 study markets for the purpose of illustrating some competitive dynamics that may exist in retail gasoline markets.

Explanation of Format
Each market commentary begins with a demographic overview as shown below, providing values and rankings for a number of parameters: • • • • • population - taken from 1991 census data, this is the population of the greater metropolitan area (census district) of each municipality. # of brands - number of brands, as reported by study participants. # of outlets - estimated number of outlets, as reported by study participants. outlets per 10,000 - number of retail outlets per 10,000 population. avg outlet volume/yr - average outlet annual throughput, based on participantprovided outlet data. Total market volume and total outlets were not used to derive this measure, as they are estimates only. 95 mktg mrgn - gross marketing margin, as defined in part A of this study. freight - freight cost per litre associated with transporting petroleum from the rack point to a typical outlet in the market. 95 prod mrgn - gross product margin, as defined in part A of this study. rank or rank* - ranking of the value within the range of study group values. Where an asterisk appears (*), rankings are lowest value = 1, otherwise highest value = 1. sample size - the number of retail outlets for which data was collected in this market.

• • • •

Where sufficient data exists, a historical record of relevant prices is shown in graphical form.

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Victoria
population # of brands # of outlets outlets per 10,000 299,550 12 106 3.54 rank 8 rank 9 rank 8 rank* 6 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3,223,068 litres 6.89 ¢ 0.41 ¢ 6.48 ¢ rank 9 rank* 7 rank* 10 rank* 7

sample size 26

General: Victoria is a relatively major market, and its location on Vancouver Island presents some uniqueness with respect to supply. Geographic / Supply / Freight cost considerations: As Vancouver Island has no refinery, Victoria depends upon marine supply from the Vancouver mainland, or potentially from any marine source of supply in the Pacific Rim. This broad access to supply has occasionally allowed some marketers to purchase “spot” gasoline at relatively low rack prices, creating a short-term drop in pump prices. In the past several years, the rack market across Canada has grown more robust, such that all Canadian rack prices now follow those in the US very closely, and most Canadian markets now benefit from the same type of cross-border rack competition that Victoria had experienced. Influence of other markets: Due to its geography, consumers in this market are somewhat “captive” to the local retail gasoline marketers: no opportunity exists to drive to other markets to purchase retail gasoline on a casual basis. This had no apparent effect on the level of competition or price levels however, as described below. Price history / Taxation: Pump prices have historically been quite volatile, often at times when other markets have been quite stable, as described above. Victoria collects a 1.5 cents per litre municipal tax. Ex-tax pump prices are on average, very close to the Canadian 10city average. Margin/Throughput relationship (Figure 24): Victoria fell within a cluster of markets with similar margin/throughput relationships. Product margin was marginally less than expected for a market with these throughput characteristics. Consolidated net revenue: No ancillary or outlet cost data was available.

Figure 27: Victoria - Price History
60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢
Crude Oil Price Vancouver Rack Price Victoria Posted Price - ex tax Canada Average - extax Victoria Posted Pump Price RUL Canadian Average Posted Pump Price

10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Jan-92 Jan-93 Jan-94 Jan-95 Oct-95 Jan-96 Jul-92 Jul-93 Jul-94 Jul-95

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a 60.ex tax Canada Average . Vancouver provides several perspectives into retail marketing.658. Margin/Throughput relationship (Figure 24): Gross product margin was slightly high.Price History 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Vancouver Rack Price Vancouver Posted Price . Low consolidated net revenues may have contributed to the higher margin. as described below.60 ¢ rank 4 rank* 9 rank* 9 rank* 11 sample size 37 General: As one of Canada’s major retail markets.extax Canadian Average Posted Pump Price Vancouver Posted Pump Price RUL MJ ERVIN & ASSOCIATES 54 .968 litres 7. The somewhat high margin placed this market slightly above.745 18 446 2. ranking 11th. net outlet revenues were less than those of other major centres.89 rank 3 rank 5 rank 3 rank* 2 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.38 ¢ 7. Geographic / Supply / Freight cost considerations: As a port city. contributing to a higher than average pump price. this market has access to numerous refiners along the Pacific coast through marine supply. Figure 28: Vancouver .542. Consolidated net revenue: Vancouver outlets averaged the highest in both ancillary revenue and outlet operating costs.Vancouver population # of brands # of outlets outlets per 10. and also has local refining capacity.98 ¢ 0.000 barrel per day plant located in the greater Vancouver area. Influence of other markets: Although relatively close to the US border. Vancouver collects a 4 cent per litre municipal tax. while average throughput ranked 4th. and with access to wholesale product by several means. Price history / Taxation: Pump and ex-tax prices have historically been somewhat higher than the Canadian 10-city average. but well within a cluster of markets with similar throughputs. driving distances preclude most Vancouver consumers from routinely accessing this neighboring market.000 1. Vancouver is also a terminal for a refined products pipeline from Edmonton. This may explain the somewhat elevated gross product margin in this market. Overall.

MJ ERVIN & ASSOCIATES 55 .630 litres 7. or competitive dynamics. adjacent to the United States border.53 ¢ rank 5 rank* 9 rank* 12 rank* 10 sample size 5 General: White Rock is situated on the lower mainland of BC. prices. Vancouver. This is likely due to the fact that unlike many smaller markets. Freight costs were accordingly low compared to other small markets in this study. due to its proximity to one. This market is close to its usual rack point. This suggests that. at least in this market. Average outlet throughputs were relatively high. this market is subject to a 4 cent per litre municipal tax. Influence of other markets: Although this market is a border-crossing community. Margin/Throughput relationship (Figure 24): gross product margin was virtually identical to that of Vancouver.604. White Rock’s margin was typical of markets with similar outlet throughputs. the study data found little to suggest a material effect upon representation. Consolidated net revenue: No Ancillary or outlet cost data was available for this market.White Rock population # of brands # of outlets outlets per 10.45 ¢ 7. gasoline “cross-border shopping” is less pronounced than might be expected. Geographic / Supply / Freight cost considerations:.000 16. Price history / Taxation: Although no specific data is available.315 4 8 4. Like Vancouver. White Rock is essentially part of a major market due to its proximity to Vancouver. prices in this market have historically mirrored those of Vancouver. the White Rock retail gasoline market displayed the same attributes as a major urban market.90 rank 14 rank 17 rank 14 rank* 13 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. and retail gross product margin was less than that of markets with a similar population base. but less than most markets with a small population base. price/competitive dynamics appeared to relate more to the influence of Vancouver than to any cross-border factors. The reality may be that the immediate necessity of filling one’s gas tank may often preclude a cross-border trip. Despite its relatively small size. thus providing some unique characteristics for the market study.98 ¢ 0. In all respects.

Price history / Taxation: As the figure below shows.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Calgary Rack Price Calgary Posted Price . Indeed.719 litres 6. Rack-to-outlet freight costs are among the lowest in the study group. Some smaller markets in the vicinity have occasionally priced below Calgary. Calgary pump prices are very close to the Canadian average. on some occasions the Calgary ex-tax RUL pump price has dropped to within one cent per litre of rack price. indicative of a strong competitive climate. Other considerations: Of the markets studied. Margin/Throughput relationship (Figure 24): Gross product margin was very typical of other study markets with similar throughput characteristics. Product is usually sourced from Edmonton refineries via pipeline.47 ¢ 0.000 710. Figure 29: Calgary . pump prices in this market have historically been well below the Canadian 10-city average. Calgary had the third highest number of retail brands.extax Calgary Posted Pump Price RUL Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 56 .675 27 313 4.24 ¢ 6.23 ¢ rank 3 rank* 6 rank* 3 rank* 6 sample size 69 General: Alberta enjoys the lowest provincial product tax rates in Canada. This trend is largely due to a low provincial tax rate: when compared on an ex-tax basis. creating some competitive pressures (see Nanton). which was one reason for selecting Calgary as a study market. Calgary is of sufficient size to support a viable rack market.ex tax Canada Average . Geographic / Supply / Freight cost considerations: Although there is no refining capability within this market.Calgary population # of brands # of outlets outlets per 10.4 rank 4 rank 3 rank 4 rank* 9 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. Influence of other markets: Calgary is fairly remote from US and other major markets. Consolidated net revenue: was typical of other major markets in the study group.827.

80 rank 9 rank 7 rank 10 rank* 10 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.Price History 65¢ Regina Posted Pump Price RUL 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ Crude Oil Price Regina Rack Price Regina Posted Price .50 ¢ 0. Although no supporting data is available.ex tax Canada Average . price volatility has eased. Since 1993. Margin/Throughput relationship (Figure 24): Although gross product margin was high relative to major markets. and this market is now more typical of other large population centres. Price history / Taxation: In the early 1990’s this market experienced frequent and pronounced price war activity. and therefore experiences no particular influences from any other major market. this market is removed from other significant markets. Figure 30: Regina .29 ¢ rank 10 rank* 8 rank* 1 rank* 8 sample size 30 General: With local refining capacity.000 179. Since then. which are among the highest in Canada. it is likely that this reflected a surplus of wholesale inventory within the local market or region. this market has generally exhibited pump prices which are somewhat higher than the Canada 10-city average. and a history of volatile pump prices. reflecting a somewhat higher than average gross product margin relative to the 10-city weighted average.extax Canadian Average Posted Pump Price 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 MJ ERVIN & ASSOCIATES 57 . Freight costs were therefore low: Regina ranked first (least) in freight costs among the entire study group. Ex-tax prices are also above average. Influence of other markets: Like Calgary.089.Regina population # of brands # of outlets outlets per 10.794 litres 7. Regina was of some interest as a study market.180 15 86 4. Geographic / Supply / Freight cost considerations: Regina possesses its own refining capacity. This is partly due to provincial taxation levels. margins and throughputs were typical of other markets with a similar population base. Consolidated net revenue: was typical of other similar markets.21 ¢ 7. and is therefore a recognized rack pricing point. supply/demand is likely more balanced.

Figure 31: Winnipeg . though somewhat higher than average ex-tax pump prices. it is an established rack price point.Winnipeg population # of brands # of outlets outlets per 10. like most markets of this population density. Margin/Throughput relationship (Figure 24): Winnipeg fell within a cluster of markets exhibiting similar margins relative to their throughputs.217 litres 8. Price history / Taxation: In the early 1990’s this market experienced some price war activity.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Winnipeg Rack Price Winnipeg Posted Pump Price RUL Winnipeg Posted Price .790 17 261 4.84 ¢ rank 8 rank* 11 rank* 2 rank* 12 sample size 61 General: The Winnipeg market is characterized by stable. this market is removed from other significant markets. although. Consolidated net revenue: No ancillary or outlet cost data was available for this market. and therefore experiences no particular influences from any other major market.ex tax Canada Average . Since then. Geographic / Supply / Freight cost considerations: No refining capacity exists within the Winnipeg market. and has remained very close to the Canadian 10-city average.extax Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 58 . this market has exhibited relatively stable pricing. probably related to a regional surplus of wholesale inventory (see Regina). On an ex-tax basis.265. This may reflect a lower than average Consolidated Net Income.23 rank 6 rank 6 rank 5 rank* 8 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.06 ¢ 0.22 ¢ 7. although there is no study data to support this.000 616. Influence of other markets: Like Calgary. possibly due to modest ancillary revenue. prices have tended to stay somewhat above the Canadian average.

Its setting on a major highway provides a significant opportunity for attracting highway motorist volume. in terms of expected petroleum revenues. this market has a relatively low freight overhead. Nanton appeared to benchmark its pump prices to those of Calgary. Nanton had the second lowest gross product margin of the study group. Nanton was the smallest market in terms of population. Despite its small size.far in excess of what would be expected of a community with a population of 1. placing Nanton well below the expected margin. Some unique characteristics of this market serve to illustrate why some smaller markets experience relatively low pump prices. in order to maintain a share of the considerable potential sales revenue that passes through this market. Nanton has traditionally priced either at or below Calgary.55 rank 19 rank 17 rank 18 rank* 19 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. the Nanton retail gasoline market displayed the same price attributes as a major urban market. Consolidated net revenue: No Ancillary or cost data was available. Nanton had a high number of per capita outlets . Unlike many of the smaller markets in this study group. This strategy has had the effect of sustaining a roughly 10 million litre per year retail gasoline market .600. MJ ERVIN & ASSOCIATES 59 . as Figure 24 shows. Nanton was perhaps the least viable market in the study group.and a low average outlet throughput. Due to its highway location and its proximity to Calgary. would have an offsetting effect. Margin/Throughput relationship (Figure 24): Like some other small markets in the study group. a feature not available to other.Nanton. while others experience consistently high prices.91 ¢ 0. situated on a major North-South highway to the United States Among the study group. Geographic / Supply / Freight cost considerations: Located within an hour’s drive of the Calgary rack. Price history / Taxation: In order to attract market share beyond simply the local population.the highest of the entire group . In this respect. although not as low as expected. it is likely that low operating costs.41 ¢ 5. While these conditions would normally result in a high gross product margin. While the margin data might suggest that retail gasoline operations in Nanton would not be profitable.000 litres 5.000 1. Alberta population # of brands # of outlets outlets per 10.071. and perhaps healthy ancillary sales associated with highway traffic. the retail gasoline market in Nanton was not restricted to the local population. Average outlet throughputs were relatively low.51 ¢ rank 15 rank* 3 rank* 10 rank* 3 sample size 2 General: Nanton is a farming community approximately 70 km south of Calgary.585 4 5 31. Influence of other markets:. more isolated small-town markets. due to its proximity to one.

In contrast to Nanton. Price history / Taxation: Peace River is typical of small. and was accordingly chosen as a study market. and due to its isolated locale in northern Alberta.Peace River. Consolidated net revenue: No Ancillary or outlet cost data was available for this market.715 6 8 11. other markets. the community of Peace River is subjected to a number of factors which give rise to higher than average prices.45 ¢ 1. its normal rack point. isolated markets. Peace River has among the highest freight cost in the study group.157.85 ¢ rank 13 rank* 16 rank* 16 rank* 15 sample size 4 General: Peace River is located at a considerable distance from the nearest source of primary supply. isolated markets.623 litres 12. Margin/Throughput relationship (Figure 24): Although gross product margins in this market were relatively high. nor is it influenced by. Alberta population # of brands # of outlets outlets per 10. this market has little or no influence upon. experiencing relatively high gross product margin and consequently. further adding to overall high pump prices. high pump prices. Supply is via tanker truck from Edmonton.6 ¢ 10.91 rank 17 rank 13 rank 14 rank* 17 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. and in fact fell into a tight cluster of four other study markets. Peace River also experiences high freight costs. they were comparable to other markets with similar average throughputs.000 6.6 cents per litre. Influence of other markets: Since it is not located on a major inter-urban thoroughfare. though fairly typical of many smaller. MJ ERVIN & ASSOCIATES 60 . Geographic / Supply / Freight cost considerations: At 1.

1 ¢ 3.975 5 6 4. and reduced pump prices. Manitoba population # of brands # of outlets outlets per 10. experiencing relatively high gross product margin and consequently. Consolidated net revenue: Low outlet throughputs were offset by higher margins.000 14. Thompson is among the highest freight costs in the study group. they were comparable to other markets with similar average throughputs.014. outlet costs were also modest typical of most smaller markets.520 litres 14.Thompson. Although outlets in Thompson appear to be as competitive as those of any other study market. MJ ERVIN & ASSOCIATES 61 . Supply is via tanker truck from Winnipeg. Margin/Throughput relationship (Figure 24): Although gross product margins in this market were relatively high. the Thompson market experiences some competitive disadvantage due to its small population base and limited market potential.01 rank 16 rank 15 rank 17 rank* 7 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. Other considerations: Like other small markets. its usual rack point.02 ¢ 11. thereby creating the potential for narrower margins. isolated markets. Influence of other markets: Since is not located on a major inter-uban thoroughfare. and in fact fell into a tight cluster of four other study markets. It also experienced high freight costs. Geographic / Supply / Freight cost considerations: At 3.08 ¢ rank 16 rank* 17 rank* 17 rank* 16 sample size 4 General: Like Peace River. would have the conflicting effect of reducing the consumer’s choice in a market with a limited choice to begin with. nor is it influenced by. a significant portion of which would likely be distributed towards supplier overhead costs. further adding to overall high pump prices.02 cents per litre. Although ancillary revenues were the smallest of the study group. other markets. resulting in per-outlet petroleum revenues which were quite typical of many markets. this market has little or no influence upon. high pump prices. remote market. the community of Thompson clearly falls into the category of a small. This however. Price history / Taxation: Thompson was typical of small. A reduction in the number of outlets might seem to be the best way to improve outlet throughput performance. These factors resulted in relatively strong per-outlet net revenues. Thompson is faced with the dilemma. and due to its isolated locale in northern Manitoba.

this market was consistently less than the 10-city average. and a resultant low consolidated net revenue.275. and is also relatively close to wholesale supply sources in the US. it is likely that outlet ancillary revenues are among the highest in the country. and first in average throughput per outlet. thus there exists a climate of robust competition.Toronto population # of brands # of outlets outlets per 10. Influence of other markets: This market is continuously linked with several other major retail markets.478 litres 3. stretching from Pickering to Buffalo. Within this region are thousands of retail outlets. Figure 32: Toronto .06 cents per litre. New York.06 ¢ rank 1 rank* 1 rank* 7 rank* 1 sample size 59 General: Within the study group.36 ¢ 0.3 ¢ 3.098. it had the second highest brand variety of the study group. Geographic / Supply / Freight cost considerations: Toronto has nearby refining capacity. similar to that of Montreal. It consequently has a low freight component.4 rank 1 rank 2 rank 2 rank* 1 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 5.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Toronto Rack Price Canada Average . This is likely offset by high operating costs. Price history / Taxation: 1995 posted pump prices in Toronto did not differ markedly from those of other major Canadian centres. On an ex-tax basis however. exhibiting a lower margin than even expected of an extraordinarily high average outlet throughput. Consolidated net revenue: Although no study data was available for this market.775 30 546 2. as evidenced by an exceptionally low gross product margin.ex tax Toronto Posted Pump Price Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 62 .extax Toronto Posted Price . With an average “blended” gross product margin of only 3. an outlet pumping significantly less than the average 5 million litres annually would not be likely to generate sufficient revenue to remain viable. In addition. this market ranked first in a number of measures: lowest gross product margin. least number of outlets per capita. Margin/Throughput relationship (Figure 24): This market stood apart from the study group.000 2.

97 ¢ 0.ex tax Canada Average . Figure 33: Ottawa . Margin/Throughput relationship (Figure 24): This market had the second highest average outlet throughput of the study group with a correspondingly low gross product margin. Price history / Taxation: Pump prices in this market were comparable to other major centres when viewed on an ex-tax basis. some of which have on occasion priced below Ottawa (see Nanton and Calgary). ancillary revenue was slightly lower than average. slightly lower that expected.145 19 209 3. Consolidated net revenue: was low. several smaller.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Ottawa Rack Price Ottawa Posted Price . and operating costs were higher than most. margins and prices in Ottawa are typical of markets with similar throughput and net revenue characteristics.29 ¢ 5. rural markets co-exist in this area.948 litres 5. This would suggest that it was as competitive as any other major market of similar size and throughput characteristics.000 678.08 rank 5 rank 4 rank 6 rank* 4 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 4.68 ¢ rank 2 rank* 4 rank* 6 rank* 4 sample size 39 General: Ottawa was very typical of major markets. Other considerations: While pump prices in this market were somewhat higher than in Toronto.extax Canadian Average Posted Pump Price Ottawa Posted Pump Price RUL MJ ERVIN & ASSOCIATES 63 . Although petroleum revenues were typical of major markets. exhibiting all of the characteristics of robust competition. Influence of other markets: Although Ottawa is the only major market in the immediate area. in fact. Geographic / Supply / Freight cost considerations: As Ottawa is an established rack point.004. freight costs within this market were quite low. and close to the Canadian 10-city average.Ottawa population # of brands # of outlets outlets per 10.

Pump prices in this market were thus typical of any market with similar throughput characteristics. a consequence of the transport distance from the rack point. this Canadian market has some difficulty in remaining both competitive and viable.Sault Ste Marie population # of brands # of outlets outlets per 10. Freight costs are therefore high. average throughputs were modest.73 ¢ 1.000 81. and accordingly. Sault Ste Marie fell into a cluster of 10 study markets of between 3 to 4 million litres in average annual throughput.465. Sault Ste Marie is a sizable market.475 10 24 2.22 ¢ 7. a product of relatively strong net petroleum revenues combined with lower than average operating costs. partly due to higher freight costs. yet with some potential for cross-border retail competition. Price history / Taxation: Ex-tax pump prices were relatively high compared to other Ontario markets. MJ ERVIN & ASSOCIATES 64 . Influence of other markets: This market is close to a US border market. Consolidated net revenue: This market showed the highest consolidated net revenue of the study group. somewhat isolated. and between 5 to 8 cent per litre in gross product margin.550 litres 8.51 ¢ rank 6 rank* 12 rank* 15 rank* 9 sample size 12 General: While situated at some distance from its nearest source of rack supply. Margin/Throughput relationship (Figure 24): While this market had the third-lowest per capita outlet population of the study group (behind Vancouver and Toronto). Geographic / Supply / Freight cost considerations: Sault Ste Marie uses Toronto as its usual rack point. This would suggest that a significant market share is being lost across the US border.95 rank 11 rank 10 rank 12 rank* 3 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.

brands. Consolidated net revenue: No data was available for this market. so that virtually all sales volume represents local demand only.76 ¢ rank 19 rank* 18 rank* 18 rank* 18 sample size 2 General: Sioux Lookout was one of the smallest markets within the study group. Sioux Lookout is well-removed from any major highway. this market experiences a high degree of price competition.Sioux Lookout population # of brands # of outlets outlets per 10. despite its high prices. was much less than expected for a market of this size.06 rank 18 rank 19 rank 19 rank* 16 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 694. in fact the second highest in the study group. It therefore presents some unique characteristics for the market study.310 3 3 9. An average outlet in Sioux Lookout pumped only 694. largely due to higher freight costs. Margin/Throughput relationship (Figure 24): Sioux Lookout’s gross product margin. MJ ERVIN & ASSOCIATES 65 .066 litres 14.2 ¢ 11. Freight costs are therefore high. This is a major factor in the high cost of gasoline in this market. and outlet throughputs of any market studied. one-seventh the average throughput in Toronto.000 3. although high. This would suggest that. and had the least number of outlets. Geographic / Supply / Freight cost considerations: Sioux Lookout is normally supplied from the Winnipeg rack via tank truck.006 litres in 1995.96 ¢ 3. Price history / Taxation: Ex-tax pump prices were relatively high compared to other Ontario markets. Influence of other markets: This is clearly an isolated market. with little or no influence from other retail gasoline markets.

Margin/Throughput relationship (Figure 24): This market would appear to be overrepresented in outlets compared to other major markets. pump prices in this market have a tendency to be volatile. This.extax Montreal Posted Price .13 ¢ rank 7 rank* 2 rank* 7 rank* 2 sample size 74 General: As the largest retail gasoline market in the Quebec/Atlantic region. placed Montreal lowest of all study markets in terms of consolidated net revenue. This market had the highest tax content of the study group due to high provincial tax rates (in 1996.144 litres 5. this market ranks first of the study group in terms of brand variety.394.43 ¢ 0. With 32 competing brands. an additional tax of 1. with resultant low average outlet throughputs.Price History 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Montreal Rack Price Crude Oil Price Canadian Average Posted Pump Price Canada Average . combined with low petroleum revenues and high operating costs.ex tax Montreal Posted Pump Price MJ ERVIN & ASSOCIATES 66 .775. and is also relatively close to wholesale supply sources in the US. Figure 34: Montreal . this market interacts with several other markets in the region. Montreal nevertheless exhibited a gross product margin which was well below that expected for these throughput attributes. pump prices in Montreal have generally been at or below the 10-city average for major markets. Consolidated net revenue: Montreal outlets had relatively poor ancillary revenues compared to the major market average. Price history / Taxation: As the figure shows. thus promoting a competitive climate.000 1.3 ¢ 5.5 cents per litre was introduced into the Montreal area). Geographic / Supply / Freight cost considerations: Montreal has local refining capacity.870 32 866 4. Influence of other markets: Like Toronto.Montreal population # of brands # of outlets outlets per 10. Montreal was included in the selected market study. a function of a competitive rack market and an excess of retail outlets competing for market share.88 rank 2 rank 1 rank 1 rank* 11 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. It therefore represents a highly competitive rack market. On an ex-tax basis however.

Chicoutimi is normally supplied from the Quebec city rack.289 litres 12. for example).08 ¢ 11.000 120. Geographic / Supply / Freight cost considerations: Although some markets of this size support a viable rack market (Saint John.28 ¢ 1. but as the figure shows. Freight costs are therefore somewhat high. although low. In the case of Chicoutimi.Chicoutimi population # of brands # of outlets outlets per 10. but is quite isolated from any other markets. Gross product margin was accordingly high.605 14 97 8. MJ ERVIN & ASSOCIATES 67 . a partial factor in the high cost of gasoline in this market.04 rank 10 rank 8 rank 9 rank* 15 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. yet is geographically quite isolated. both pump and ex-tax prices in this market were higher than average.2 ¢ rank 12 rank* 15 rank* 13 rank* 17 sample size 16 General: The Chicoutimi area was somewhat unique among the study markets in that there is a relatively large population base. Margin/Throughput relationship (Figure 24): Outlet throughputs. this market has little potential as a rack market. by tank truck.250. were quite typical of markets with similar populations. Price history / Taxation: Chicoutimi benefited from a special Quebec tax reduction which applies to certain markets in remote areas and within 20 kilometers of the provincial border. Influence of other markets: The Chicoutimi / Jonquiere market represents a sizeable population base. Nevertheless. within a cluster of other markets with similar attributes. Consolidated net revenue: was average among the study group. this amounted to a reduction of 5.75 cents per litre.

with little or no influence from other retail gasoline markets. a product of high freight costs and gross product margins. Influence of other markets: This is clearly an isolated market.900 litres 17. MJ ERVIN & ASSOCIATES 68 . both pump and extax prices in this market were higher than average. by tank truck.17 ¢ rank 18 rank* 19 rank* 19 rank* 19 sample size 2 General: Gaspé is a relatively small market.33 ¢ 14. a key factor contributing to its 14.50 ¢ 3.000 16. in fact the highest in the study group. Gaspé is well-removed from any major highway.75 cents per litre. this margin was only slightly higher than expected for a market with these throughput attributes. so that virtually all sales volume represents local demand only.400 6 13 4. Consolidated net revenue: No data was available for this market. located at a considerable distance from its rack source of supply. Nevertheless. Freight costs are therefore high. ancillary revenues would likely be modest.17 gross product margin the highest of the study group. in the case. Geographic / Supply / Freight cost considerations: Gaspé is normally supplied from the Montreal rack. Although operating costs are likely to be low in a small market like Gaspé.88 rank 13 rank 13 rank 8 rank* 12 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 981. Nevertheless. amounting to a reduction of 5. This is a major factor in the high cost of gasoline in this market. Margin/Throughput relationship (Figure 24): This market had the second-lowest outlet throughput of the study group. Price history / Taxation: Gaspé benefited from a special Quebec tax reduction which applies to certain markets in remote areas and within 20 kilometers of the provincial border.Gaspé population # of brands # of outlets outlets per 10.

That a major refinery resides in this market might suggest that these prices should be among the least in the country. Figure 35: Saint John NB .970 9 56 7. freight costs in this market are low. which for Saint John. reflected in the high ex-tax pump price.694 litres 9.27 ¢ 9.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Saint John Rack Price Canadian Average Posted Pump Price Saint John NB Posted Pump Price RUL Saint John Posted Price .47 rank 12 rank 11 rank 11 rank* 14 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. Influence of other markets: Although rack pricing is potentially subject to influence from other Atlantic coast terminals. Price history / Taxation: Historically. with or without a local refinery. Accordingly. In fact. Consolidated net revenue: was average for the study group.000 74. the Saint John retail market is relatively isolated from other retail markets of any significance.095. Margin/Throughput relationship (Figure 24): Saint John is somewhat over-represented by retail outlets. resulting in lower than expected average outlet throughputs.Saint John NB population # of brands # of outlets outlets per 10. do not differ markedly from any other rack point in the study group. posted pump prices in the Saint John market have closely followed the 10-city average. ex-tax prices were relatively high. Geographic / Supply / Freight cost considerations: Saint John is home to a large regional refiner.ex tax Canada Average . retail pump prices are ultimately a reflection of rack prices. it is an established rack point. and therefore.79 ¢ 0. The only real benefit that a local refinery provides is the modest rack-to-outlet freight cost factor. Average gross product margin was consequently high.52 ¢ rank 14 rank* 13 rank* 4 rank* 13 sample size 17 General: As a major refining centre in Atlantic Canada. Saint John presents some unique characteristics for the market study. and is capable of shipping and receiving wholesale product through marine facilities. Nevertheless. this market fell within the expected range of gross product margins as a function of outlet throughput.extax MJ ERVIN & ASSOCIATES 69 . Since provincial taxes are among the lowest in the country.

Halifax
population # of brands # of outlets outlets per 10,000 330,845 9 113 3.42 rank 7 rank 11 rank 7 rank* 5 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3,058,010 litres 6.0 ¢ 0.27 ¢ 5.73 ¢ rank 11 rank* 5 rank* 4 rank* 5

sample size 18

General: As the largest population centre in Atlantic Canada, Metro Halifax was included in the selected market study. Geographic / Supply / Freight cost considerations: This market is served by a number of regional refineries, including one situated locally. Its marine port status allows for the potential import of refined product from any one of several refiners on the US east coast or western Europe. Influence of other markets: The Halifax/Dartmouth market represents a sizable population base, with a commensurate representation of retail outlets. It is relatively isolated from other retail markets of any significance. Price history / Taxation: For a number of years until mid-1991, retail pump prices, numbers and types of outlets and pump service (full vs self-serve) were regulated by that province’s Public Utilities Board (PUB). This structure was likely responsible for the historically high pump prices that existed in this market until late 1992. Since then, pump prices have generally fallen to reflect market conditions, and have on occasion, experienced price war activity, most notably in 1996, where at times, prices fell below the posted rack (wholesale) cost. Margin/Throughput relationship (Figure 24): Halifax exhibited a gross product margin well below that expected for these throughput attributes. While product margin ranked 5th lowest in the study group, outlet throughput was disproportionately low, ranking 11th. Consolidated net revenue: No data was available for this market.

Figure 36: Halifax - Price History
65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96
Crude Oil Price Halifax Rack Price Canadian Average Posted Pump Price Halifax Posted Pump Price RUL

Halifax Posted Pump Price - ex tax Canada Average - extax

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Charlottetown
population # of brands # of outlets outlets per 10,000 15,395 5 23 14.94 rank 15 rank 15 rank 13 rank* 18 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 1,890,648 litres 11.17 ¢ 1.14 ¢ 10.03 ¢ rank 17 rank* 14 rank* 14 rank* 14

sample size 4

General: As PEI is the only province that regulates gasoline prices, Charlottetown was included in the study group to derive some insights into its possible effect on competitiveness. Geographic / Supply / Freight cost considerations: This market receives marine supply, usually from Halifax, but often from one of several marine terminals in the region, including Saint John, Quebec city or Montreal. Influence of other markets: Due to its island setting, retail consumers have little opportunity to shop adjacent markets for the lowest-priced gasoline. Price history / Taxation: Charlottetown has perhaps the consistently highest ex-tax pump price of any urban market in Canada. Margin/Throughput relationship (Figure 24): Charlottetown is probably over-represented by retail outlets, resulting in lower than expected average outlet throughputs. Average gross product margin was consequently high, reflected in a high ex-tax pump price, although it was comparable to other markets with similar throughputs. Consolidated net revenue: No data was available for this market. It is unlikely that the removal of price regulation would result in pump prices any higher than already exist in this market. Competitive disadvantages which exist in PEI markets are shared with many other non-regulated markets which exhibit a pattern of lower prices. Therefore, there is likely no consumer benefit, and there may be some detriment attached to the PEI regulatory structure, as evidenced by its pricing history and that of Halifax. Finding 22: Some instances of direct government intervention into petroleum marketing have been shown to have a possible adverse effect on competitiveness, and likely a negative impact on consumers.

Figure 37: Charlottetown - Price History
65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jul-92 Jul-93 Jul-94 Jul-95 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96
Crude Oil Price Halifax Rack Price Canadian Average Posted Pump Price Charlottetown Posted Pump Price RUL

Charlottetown Posted Price - ex tax Canada Average - extax

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Part E

Findings, Conclusions & Recommendations
This Retail Petroleum Markets study meets the study objectives of: • • • • providing a sound database for policy direction; providing a means to better understand competitive opportunities and challenges; assessing the viability and competitiveness of regional markets; and determining key competitiveness factors in specific markets.

The study thus provides a tool to understand the dynamics of this vital and complex industry, and a foundation for effective policy development.

Findings
This study presented twenty-two findings which are derived from the pump price model analysis, historical evaluation of pump prices and margins, and specific market analysis: Finding 1: Refiner and Marketing Margins are a consequence of their defining prices, in turn determined by competition on a continental (Rack Price) or a local (retail pump price) scale............................................................................................. 7 Finding 2: 1996 average crude price, as a factor of the regular gasoline retail pump price, was 19.1 cents per litre, or roughly 34 percent of the pump price................... 9 Finding 3: The infrastructure of the Canadian refiner sector provides the necessary conditions required for competitive, market-driven Rack (wholesale) pricing of petroleum products................................................................................................... 11 Finding 4: In 1996, petroleum taxes accounted for 50.3 percent of the average urban price of regular gasoline in Canada................................................................ 17 Finding 5: In 1996, the average Gross Refiner Margin available to Canadian petroleum refiners to provide for all operating costs and profits on the manufacture of regular gasoline, was 5.3 cents per litre............................................................... 17 Finding 6: In 1996, the average Gross Product Margin available to Canadian petroleum marketers to provide for all operating costs and profits on the sale of regular gasoline in a typical urban market, was 3.5 cents per litre. ......................... 17 Finding 7: Price uniformity and price volatility, facilitated through street price signs, are indicators of a competitive market........................................................... 21 Finding 8: Some competitiveness inhibitors may exist in the retail gasoline market which are regulatory in nature, but exist to meet other important societal needs.... 23 Finding 9: Pump prices are established by the local dealer at over half of all retail outlets in Canada. ..................................................................................................... 28 Finding 10: Gasoline has remained at or below the “all items” Consumer Price Index nine out of the past ten years.......................................................................... 31

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........ which in turn.............. particularly in comparisons of major urban markets to small........................................... ..Finding 11: Retail pump price trends are principally a reflection of changes in the underlying rack (wholesale) price of petroleum products........................................... .............................. ..... The study average retail gasoline outlet would have experienced a net loss without the contribution of ancillary operations............... 45 Finding 18: After accounting for differences in taxation and freight the remaining difference in retail pump prices between markets is very closely linked to market differences in average sales volumes such that markets with low Gross Product Margins are associated with high outlet throughput volumes....... the profitability of the 481 outlets studied appears only marginal. ..................... these ancillary operations contributed to a lower product margin and consequently.............51 Finding 21: Based on published rack prices and the individual outlet data. residuals for outlets not studied may be better.... remote population centres........................... when compared on an ex-tax basis. 71 MJ ERVIN & ASSOCIATES 73 ...................... are principally a reflection of changes in the underlying price of crude oil..... 50 Finding 20: For the 481 individual outlets studied....................... 43 Finding 17: Market-specific differences in product freight are a key factor in intermarket ex-tax pump price differences... . 32 Finding 12: Retail pump price increases from 1994 to 1996 are wholly attributable to increases in petroleum product taxation and crude costs.... the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre. 33 Finding 14: Canadian retail gasoline pump prices are the competitive equal to those of the US............................................. In effect. given the possibility of discounts from posted rack prices and potentially lower overhead costs...................... the residual represented a net loss to the supplier................................ 33 Finding 13: From 1991 to 1996............... 52 Finding 22: Some instances of direct government intervention into petroleum marketing have been shown to have a possible adverse effect on competitiveness........ while those with high Gross Product Margins tend to have low outlet throughputs..................................... 48 Finding 19: Based on published rack prices....... and likely a negative impact on consumers............ 35 Finding 15: Seasonal fluctuations in retail pump prices are ultimately linked to wholesale product inventory levels......... The viability of the Canadian retail gasoline sector as a whole may be somewhat better................ reduced pump prices.... while average combined Gross Refiner and Gross Marketing Margins decreased by about 7 cents per litre. after the average 1995 consolidated revenues were distributed to meet dealer income and the supplier’s marketing overhead requirements.... 37 Finding 16: Provincial differences in product taxation are a predominant cause of inter-regional pump price differences......... Taking into account the possible discounts from posted rack prices and independent brands’ lower marketing overheads........ ............................... petroleum sales revenues alone were insufficient to cover operating costs for the 481 outlets studied................................. a feature of most market-regulated commerce............................................. which ensures a competitive product price for buyer and seller alike................................

a consistent pattern of competitiveness emerged when comparing product margins to their associated average outlet throughputs (Finding 18). The resultant margins. This price/margin model illustrates that the various sector margins are a consequence of the prices at which feedstock or wholesale product is bought and then sold (Finding 1).Conclusions The study findings lead to a number of conclusions relating to the competitiveness of Canada’s petroleum marketing sector. which also serves to illustrate the interrelationships between the various stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. each with unique dynamics. in comparing Canada average (city) pump prices to those of the United States. place. The Canadian retail petroleum products industry. was shown to be strongly competitive: • A long-term decline in pump prices. The study presents such a model. In comparing several diverse markets. over the long term. by all objective measures available to this study. On a national level. price is but one of four competitiveness “tools” available to marketers (product. The contrary notion that a given refiner or marketer is free to establish a price based upon a minimum margin requirement. 2. This has not simply been a result of a decline in underlying raw materials costs. which at times can decline to very low or MJ ERVIN & ASSOCIATES 74 . and promotions are the other three). when taxes were excluded (Finding 14). Although an objective measure of competitiveness is elusive. • • These findings are likely in sharp contrast to a common public perception of this industry in general and price trends in particular. the very margins within which this industry operates has. 1. a variety of available data suggests that a state of vigorous competition exists in the Canadian petroleum marketing sector. Critical to the overall success of this study was the development of a model which would create a common frame of reference for the considerable terminology that accompanies an industry as complex as Canada’s petroleum sector. As described in this study however. was observed (Finding 10). Closer examination of these strategic tools might yield additional insights into the nature of competition in this industry sector. is mistaken. The economic relationship of the petroleum marketing sector with its related stakeholders is a complex one. Canadian prices have been at or below US prices in recent years. Virtually all of the competitiveness indicators examined in this study relate to price. Rack and pump prices are determined in competitive marketplaces. when measured in constant and nominal dollars. exhibited a diminishing trend (Finding 13).

or even between Canadian markets with differing tax structures. This implies that the competitive dynamics pertaining to these retail markets can. since this is the effective range of consumer choice. In applying such a model to the retail petroleum marketing industry. taxation differences between Canadian and US markets. it is important to understand that. but not beyond the reach of any organization wishing to truly understand petroleum competitiveness issues. or 6 percent (Finding 6) of the 1996 average regular pump price. for example) were rationalized. the responsibility for deciding upon retail pump prices was shown to reside principally at the local dealer level (Finding 9). taxation as an element of public policy is an area worthy of additional research. presents a competitive disadvantage to Canadian marketers. This study’s analysis of NRCan urban regular gasoline prices shows that the tax content in a typical consumer’s gasoline purchase is about 50 percent (Finding 4). rack price and freight cost. Dealers were shown to have a variety of relationships with their supplier. measured against the average outlet throughput for that market. experienced higher than average pump prices. when the “outside” factors (tax. Petroleum product taxes are levied at the federal. these markets have managed to sustain a certain level of viability and competitiveness. refiner margins accounted for 5. while crude oil markets are considered global in scope and rack product markets are considered regional in scope. MJ ERVIN & ASSOCIATES 75 . particularly smaller ones. The measurement and analysis of the effect of petroleum taxation levels in Canada compared to other countries is well beyond the scope of this study. Due to the localized nature of competition in the retail gasoline marketing sector. and do. vary considerably from one population centre to another. retail petroleum markets are considered local (municipal) in scope. are thus a reflection of the state of product supply. the resultant margins were found to display a distinct relationship with average outlet throughputs for each market. well over half of all outlets in Canada operate as lessees or independents. demand and other competitive factors existing at the time. and in some markets.even negative values. but given its magnitude. but even in such cases. This would entail the tracking of not only pump price. generally do not serve as competitiveness inhibitors.3 cents or 9 percent (Finding 5). and accordingly. crude costs accounted for roughly 34 percent (Finding 2). A much more accurate barometer of industry competitiveness would therefore be the rack-to-retail or gross product margin. and in some markets. and are a predominant cause of inter-regional pump price differences (Finding 16).5 cents. an exercise that consumers are unlikely to engage in. and product margins accounted for 3. The demonstrated exception to this is in markets directly adjacent to nearby US markets. The latter two can vary considerably from one market to another. By contrast. Taxation is a significant factor in the price of retail gasoline. municipal levels of government. 3. but also rack prices and outlet performance. provincial. While some markets.

supplier costs and profitability. predictable seasonal pattern. when examined on the margin-volume model. The pump price/margin model shows that in 1996.Canadians nevertheless enjoy one of the lowest average gasoline taxes in the industrialized world. Pump price fluctuations can be an indicator of competition in the marketplace. a price-stable market. In fact. Retail pump prices showed a corresponding seasonal pattern. second only to the United States. This study’s marginvolume model could detect no difference between price-volatile markets such as Toronto. constitute a small portion of the retail pump price. fluctuating prices are a strong competitiveness indicator (Finding 7). While price wars are undoubtedly an indicator of competitiveness. translates into supplier profits of an estimated one cent per litre of petroleum sales in the case of smaller markets. which in turn is the principal driver of ex-tax pump prices. is available to provide for all retail marketing operations including outlet costs. This margin represents gross revenue (after wholesale product and freight cost) which. Retail pump price changes showed a close relationship to underlying rack prices. 4. on a per litre basis. in a highly distinct. which in turn. when distributed these three ways (Finding 20). which represent the majority of Canada’s population base.5 cents per litre on the sale of regular gasoline in a typical major urban market (Finding 6). incorporated with ancillary revenues and outlet costs. Retail gasoline marketing revenues. 5. showed a close relationship to underlying crude prices (Finding 11). exhibited competitive traits typical of any of the study markets. MJ ERVIN & ASSOCIATES 76 . This consolidated outlet revenue. on the basis of price fluctuation alone. the Canadian retail marketing sector realized an average gross margin of 3. and more price-stable markets such as Sioux Lookout. While these findings are somewhat qualified in terms of this study’s use of posted rack prices as the derivation basis. This relationship between price and demand was cited as the essence of competitiveness in the petroleum rack marketplace. reflecting consumer demand behavior (Finding 15). it can still be concluded that the petroleum marketing sector constitutes a small portion of the total retail pump revenue distribution. Viewed from this perspective. further suggesting that a strongly competitive environment exists in the refiner sector as well (Finding 3). Sioux Lookout. and a loss in the case of urban markets. the absence of price war activity does not imply a lack of competitiveness. Rack prices were shown to not significantly differ between major centres. dealer income. Demand for gasoline was shown to vary significantly according to the time of year.

Industry profitability is extremely sensitive to very small changes in pump price. based upon an assumed posted rack price. assuming all other costs were unchanged. Declining refiner and marketing margins. and have resulted from. these findings clearly show that pump price increases are ultimately linked not to increased profits. but to increases in underlying rack prices. despite the predisposition of many observers to use them as such. and the associated industry initiatives which are ongoing in nature. MJ ERVIN & ASSOCIATES 77 . Also. profit margins in this sector can be stated to be in the order of 1 to 2 cents per litre in a “good” year. Thus. serve as perhaps the most significant indicators of competitiveness in the downstream industry. improving retail outlet performance through outlet rationalizations (closures) resulting in higher unit throughputs (sales volumes). in the long term these fluctuations are likely more reflective of market restorations. Annual residual profits available to petroleum marketers is in the order of perhaps one cent per litre. Since 1991. pump price signs are particularly ineffective as a barometer of petroleum marketer competitiveness and profitability. This trend has both resulted in. Indeed. most outlets used in the 19-market study represent major integrated oil companies. A truly objective barometer of downstream industry influence on retail pump price lies in the measurement of margin. It is likely that regional and nonrefiner marketers operate with somewhat smaller overhead costs than those used in this study. Thus.6. intense competitive pressures in the downstream industry in general. and in turn. both of which are beyond the direct influence of Canada’s oil companies. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. 7. this industry sector would have realized profits of unprecedented proportions. not excessive profits. Nevertheless. not price. the rack price basis used in this study probably understates actual revenues by about 1 to 2 cents per litre. Both the downward trend in margins. if Canadian average pump prices were only one cent higher than they were in 1995. Changing conditions in Canada’s downstream petroleum sector have caused retail pump prices to remain relatively flat since 1992. the combined downstream (refiner and marketing) margin in Canada decreased by about 7 cents per litre (Finding 13). although pump prices in some markets can fluctuate by several cents per litre in the course of a week. crude costs. despite increases in tax content and crude costs (Finding 12). including: • • • improving production efficiency through refinery plant rationalizations (closures). and has been a result of. While these economics might appear to place this industry in a position of poor viability. several competitive strategies. Also. have caused. and the marketing sector in particular.

a distinct pattern emerged: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market (Finding 18). That such a relationship should exist was not surprising. thereby improving petroleum volumes and ancillary revenues at the remaining sites. reducing the number of outlets may also reduce the number of competitors. 9. While competitiveness in most smaller markets was shown to be as active as in larger centres. most markets. according to the margin-volume model. although this study provides comprehensive evidence of this. it would seem that if local government in smaller markets were interested in lowering pump prices. and this study showed that gasoline prices were no exception. A wide range of petroleum gross product margins were evident within the 19market study group. had petroleum margins which were commensurate with average outlet throughput for that market. more isolated markets are generally higher than in larger centres. • • At first glance. When these margins were compared to their corresponding outlet throughputs. which should. Low ancillary revenues Outlets in smaller centres received significantly less ancillary revenue than their group A counterparts. likely due to the different geographic and lifestyle differences that exist in small communities compared to major cities. This was due to three factors: • Low average outlet throughputs The average group B outlet sold approximately 1. reduce pump prices. other factors exist which contribute to relatively high margins and prices. average pump prices were relatively high. poor outlet throughputs were generally the predominant factor.8. Although some smaller markets appeared to have higher gross product margins than larger markets. High distribution costs Smaller markets are generally further removed from their source rack point than larger centres. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. which could actually inhibit competition. Outlet throughput is a key determinant of inter-market pump price differences. virtually all of the 19 study markets exhibited similar levels of competition. MJ ERVIN & ASSOCIATES 78 . the solution would be to encourage some dealers to exit the market. When plotted against the margin-volume model. This created some economic pressure to sell product at a higher pump price.5 million fewer litres of gasoline than a group A (major centre) station. and therefore suffered an additional distribution cost disadvantage of about 2 cents per litre on average (Finding 17). The costs of most consumer goods in smaller. Smaller. In suggesting this approach however. Thus. there are three points to consider: • In very small markets. in order to generate sufficient revenue to cover the outlet’s fixed operating costs. regardless of size. isolated markets face particular challenges: although found to be highly competitive.

Also. and the traditional automotive service bay. has seen a decline in pump prices relative to other Canadian markets. were cited as examples of ways in which outlet petroleum sales are augmented by other revenues. in order to build upon the findings in this study towards a full understanding of the dynamics at work. is viewed as an agency which exists to the benefit of industry and consumer alike. Convenience store. and likely others in Nova Scotia. A full analysis of the various features of the Nova Scotia and PEI regulatory structures. This is not to say that all direct government intervention into marketing practices is certain to produce undesirable results. the degree of price competition in the retail petroleum has in effect. car wash. is both the cause and consequence of increased activity in ancillary operations. The 19-market study provides some insights into the issue of whether or not regulated retail gasoline markets serve to benefit consumers (Finding 22). Charlottetown. This will be driven by the depressed petroleum product margins which currently exist in the petroleum marketing sector. Non-petroleum revenues at retail gasoline outlets will continue to gain prominence. Retail ancillary operations are a critical element of petroleum price competition. characterized by narrow product margins and relatively flat pump prices. does not appear to benefit in consumer terms. is well beyond the scope of this study. and as such. 11. Government intervention into petroleum marketing is likely a poor alternative to market-based regulation. As these findings show. Some impediments to market exit may exist in the form of petroleum underground storage tank regulations which may present to the operator the option of pumping gas as the better alternative to decommissioning the site and possibly incurring prohibitive remediation costs.• A full-serve retail gasoline outlet typically employs 3-5 staff. are an acceptable limitation on pure competition (Finding 8). The historical record is clear however: since deregulating pump prices. many national and local environmental regulations exist for good cause. and in turn. This competition then. as marketers find even more innovative ways to attract market share. 10. The loss of employment represented by a station closure may be of some concern to smaller communities. MJ ERVIN & ASSOCIATES 79 . will likely preserve a highly competitive petroleum market. The federal Competition Bureau for example. Ancillary or non-petroleum revenue is described as an increasingly important feature of the retail gasoline marketing demography (Finding 19). under the current PEI regulatory structure. depressed petroleum revenues below that of outlet operating costs. and the perceived effect on their markets. the Halifax market. • The particular competitiveness and viability issues facing smaller markets is an issue worthy of further study.

in a simple format designed for consumers and legislators. Organizations such as the Canadian Petroleum Products Institute and the Petroleum Communication Foundation would therefore have an expanded role to play in commissioning and regularly disseminating the results of these recommended initiatives.This study proposes rather. that where a healthy competitive climate exists. Ways in which this gap can be closed might include: • Ongoing third party evaluation of prices. Individual companies within the retail petroleum industry have been reluctant to speak directly to the issue of gasoline pricing and competitiveness. petroleum marketing competitiveness. This study might be used as the concept basis for a comprehensive annual update of price/margin trends and selected market competitiveness research. margins and competitiveness factors. and the converse image held in much of the public domain. Public perception measurement. Industry and government have an opportunity to continue to work together in cooperative research similar to that which this study represents. not inhibit. Research into the specific competitiveness issues of concern to consumers would provide valuable direction for groups conducting industry competitiveness research. as it does in the Canadian petroleum marketing sector. This should be in the form of a quarterly summary of price trends and related measurements. A regular comprehensive competitiveness evaluation. Improve public understanding and awareness of competition in the petroleum marketing sector. • • Would this enhance the competitiveness of this sector? It is felt that better public understanding of this industry’s record of competitiveness. direct regulatory interventions may have an adverse effect on competitiveness. 1. possibly to the detriment of the consumer. 2. would ultimately be reflected in carefully-considered public policy which serves to truly enhance. This study alludes to several potential study initiatives which go well beyond the objective of public awareness and may assist both the public and private sector policy and strategic directions: MJ ERVIN & ASSOCIATES 80 . Recommendations This study advances two recommendations to enhance the existing competitiveness in Canada’s petroleum marketing sector. Develop cooperative industry research into marketing sector competitiveness issues. and the nature of competitiveness influences. A recurrent theme arising from this study’s conclusions is the likely gap that exists between the demonstrably high level of competition within this industry sector.

the possible effect of underground storage tank legislation as a potential barrier to market exit and competitiveness inhibitor. and in particular. and regulators alike. and issues/opportunities facing such markets. Taxation: An analysis of taxation levels on industry and consumer behavior and as a tool of policy and revenue. A better comprehension of the true issues and opportunities facing this industry would be an important step in the right direction towards stable and effective policy. using Canadian and foreign selected markets. using Canadian and foreign selected markets. Small Market Competitiveness: Detailed research into small market outlet economics and competitiveness. Regulatory Intervention: Historical and theoretical research into government regulation of petroleum markets. along the lines of the model used in this study.• Price/Margin Modelling: Development and adoption of a standard price model and associated terminology by industry/government. MJ ERVIN & ASSOCIATES 81 . consumers. is vital if Canadians are to put in place the structures that truly meet their social and economic needs. by industry. Lack of understanding of this industry can lead to misguided policies which benefit neither the industry nor the consumer. • • • • * * * Better understanding of this industry. using Canadian and foreign selected markets. Marketing Strategy Effectiveness: Research into price and non-price marketing strategies and their relative influence on consumer response.

Appendices MJ ERVIN & ASSOCIATES 82 .

Dealer . Integrated Oil Company . for example.a particular mode of retail petroleum operation where the outlet operator (dealer) leases the retail outlet from the product supplier. the regular unleaded pump price. There are several modes (see below) of dealer operation. currently established at 10¢ per litre.a service provided in addition to the basic retail petroleum sales operation. Downstream . Major Oil Company . service bays. Excise Tax . and included in the retail pump price. GST. health. lubricants.a generic term referring to a retail outlet operator. Ex-tax Pump Price . CPPI . and commission dealers. in cents per litre. etc. and therefore purchases its supply of petroleum product from an outside source.. The ex-tax pump price is exclusive of these taxes. such as a retail gasoline outlet. safety and business issues..I Glossary of Terms Ancillary service .(for the purpose of this study) the cost. and in some regions. Lessee .the retail price of gasoline that would be displayed if all product taxes were removed. Grade Differential . Usually expressed on a per-unit basis. of transporting petroleum product from the rack point to the final point of sale. MJ ERVIN & ASSOCIATES 83 .a petroleum marketer which is involved in both the upstream and downstream aspects of the oil industry. car wash. such as a major oil company or regional refiner/marketer. an association of petroleum refiners and marketers.an organization who sells refined petroleum products to end-use consumers. Independent Petroleum Marketer .Canadian Petroleum Products Institute. Margin . etc. which serves as the voice of the petroleum products industry in Canada on environment. municipal tax levees.the segment of the oil industry involved in the refining and/or marketing of petroleum products such as gasoline.the difference in pump price between a premium or mid-grade of gasoline vs.the difference which exists between net sales and the cost of merchandise sold and from which expenses are usually met or profit derived. such as lessees. diesel. provincial pump tax. independent dealers.a petroleum organization involved in both the refining and marketing of petroleum products which has marketing operations in most or all of Canada’s provinces. Marketer . but inclusive of any corporate taxes on earnings.a petroleum marketer who is not involved in the refining of petroleum products. generally expressed in cents per litre. These product taxes include Excise tax.a federal tax on retail gasoline purchased by domestic (ie: motor vehicle) consumers. Distribution Costs . and purchases petroleum products from the same supplier for resale at a pump price determined by the lessee. such as convenience goods.

with a non-advocacy mandate to improve public awareness of Canada’s petroleum sector. is typically also the brand name owner of the chain of gasoline stations to which it supplies refined petroleum products. In the retail gasoline sector.within the context of retail gasoline marketing. lessee. these can be broadly classified as company operated. an association of upstream and downstream oil companies and related organizations. it is usually based on the market-driven rack price.the internal price paid by an integrated refiner/marketer to its own refinery for refined petroleum products. commission dealer. Rack Point .the type of contractual relationship between the supplier and the dealer (outlet operator). manufactures (from crude oil) a range of petroleum products suitable for consumer use. Rack Price .an organization who. Upstream . and independent dealer. MJ ERVIN & ASSOCIATES 84 . the supplier has initial title to the petroleum product as it leaves the rack point. Supplier .Petroleum Communication Foundation. Transfer Price . usually per month or per year. This may be at a refinery loading terminal.the volume (ie: in litres) of petroleum sold at a retail outlet in a given period.Mode .the wholesale price posted at the rack point. Refiner .the segment of the oil industry involved in the exploration and/or production of crude oil. or at one on several loading terminals (usually in major population centres) where petroleum is marketed to non-refiner supplier/marketers at posted rack prices. PCF . Although in theory the transfer price could be set at any arbitrary value. the raw material from which petroleum products are manufactured.a petroleum organization involved in both the refining and marketing of petroleum products which has marketing operations in a limited number of provinces. Throughput . Regional Refiner/Marketer .the point at which title to refined product is transferred from the refiner to the supplier.

7 95.4 110.9 122.5 111.3 55.0 97.4 120.8 104.4 53.4 124.4 45.4 136.1 151.5 120.8 1987 104.8 95.3 1989 114.5 25.1 104.0 111.4 57.8 130.5 124.4 29.0 30.4 152.3 19.1 117.1 87.7 96. 1986 Constant (¢/litre) (3) RUL Ex-tax Price.1 117.3 96. Constant dollar RUL gasoline values were derived by applying the “All Item” CPI to the nominal price for that year.4 97.0 19.2 20.0 42.1 146. 62-010: Consumer Prices and Price Indexes.9 108.8 132.0 102.3 134.2 49.8 93.3 58.7 123.3 151.5 30.1 120.3 139.7 132.9 118.1 1990 119.7 30.0 93.4 104.2 45.8 135.5 115.7 124.1 26.3 52.9 26.4 122. No.8 47.3 27.II Source Data Tables Table A: CPI Index: Selected Goods and Services Year **All Items** (1) Food Shelter Natural Gas Fuel Oil Telephone Gasoline Auto Repair Alcoholic Beverages Domestic Water Domestic Electricity RUL Annual Price.6 91.7 54.1 167. Nominal (¢/litre) (2) RUL Ex-tax Price.8 94.1 144.2 121.3 119.2 31. MJ ERVIN & ASSOCIATES 85 .2 99.2 50.1 103.9 1995 133.9 97.3 132.1 97.6 107.3 122.1 126.3 160.6 133.7 22.3 115. 1986 Constant (¢/litre) (3) 1986 100 100 100 100 100 100 100 100 100 100 100 47.2 127.7 122.1 120.9 155.1 105.6 136.5 100.0 115.0 1988 108.2 39.9 26.5 94.2 92.4 34.1 40.3 1992 128.2 142.3 125.5 145.4 27.0 93.5 112.7 29.0 135.8 108.3 40.6 51. using a weighted (by provincial gasoline demand) 10 city average.1 104.9 1994 130.4 134.6 122.5 126.1 115.2 133.8 28.2 45.9 1993 130.5 49.3 141. Nominal (¢/litre) (2) RUL Annual Price. Nominal RUL (Regular Unleaded) price and ex-tax price is from Natural Resources Canada.8 106.9 115.0 104.0 32.7 118.1 48.7 Note 1 Note 2 Note 3 Price Index data is from Statistics Canada Cat.2 112.2 30.0 1991 126.4 104.6 92.2 109.

8 57.1 39.8 25.8 26.0 7.5 57.4 MJ ERVIN & ASSOCIATES 86 .5 15.0 24.2 14.2 65.4 26.2 16.5 8.5 23.0 28.4 31.6 23.0 16.3 54.9 15.2 56.5 5.1 52.5 11.4 12.6 13.1 21.5 Gross Marketing Margin Gross Refiner Margin 53.7 14.9 7.3 22.7 19.7 23.5 19.5 26.2 63.2 4.2 14.9 14.1 5.2 13.2 27.3 4.0 16.6 6.9 26.0 26.7 4.6 26.4 33.6 54.0 25.0 26.0 7.2 25.6 25.9 25.9 24.1 16.1 13.0 24.2 7.1 7.9 12.0 22.2 6.0 4.3 15.2 26.7 14.6 28.0 8.3 42.3 56.0 15.7 39.1 29.9 6.4 14.5 22.4 15.0 7.7 15.2 15.7 14.9 31.2 22.0 54.4 21.0 24.9 13.4 22.5 26.7 63.3 66.8 23.1 16.Regular Gasoline RUL Canada Avg Jan-90 Feb-90 Mar-90 Apr-90 May-90 Jun-90 Jul-90 Aug-90 Sep-90 Oct-90 Nov-90 Dec-90 Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Pump ex-tax Rack Crude Price Pump 10 city Avg Edmonton 30.5 14.8 28.0 26.6 26.5 35.6 24.6 25.4 26.7 13.0 9.9 56.0 12.2 23.8 55.7 29.8 53.7 6.5 56.1 16.6 8.3 13.9 23.4 20.8 53.5 30.9 4.6 4.8 8.5 32.2 23.1 22.7 4.6 23.6 9.9 6.1 16.5 10.1 53.4 53.7 24.0 25.8 14.8 14.4 30.8 14.3 13.8 30.5 7.2 12.4 8.4 57.7 18.3 54.7 7.6 20.8 11.6 7.3 13.3 Tax Content 23.8 55.1 7.5 25.4 56.5 27.Table B: Key Price / Margin History .3 12.4 34.4 13.1 19.9 7.1 22.9 54.6 5.6 13.5 14.2 11.1 17.9 25.5 23.4 29.1 23.3 57.3 6.7 58.5 31.9 22.2 16.8 16.4 14.3 24.1 13.9 7.7 8.0 33.0 24.8 15.1 24.9 30.8 22.6 54.9 11.2 41.9 25.9 9.2 26.2 8.3 25.7 19.2 27.0 5.3 56.3 13.4 32.3 26.9 26.9 21.6 26.7 Downstream Margin 14.4 26.3 6.8 21.7 32.1 23.2 24.0 20.2 21.9 23.7 33.0 14.3 23.7 14.2 13.4 9.5 10.2 29.8 21.8 24.0 13.5 33.2 6.2 25.9 56.0 24.2 7.0 55.7 25.7 4.8 23.8 8.0 52.4 7.6 21.4 14.5 28.9 14.0 10.3 14.8 14.3 54.3 13.0 24.9 23.4 58.7 28.2 27.5 54.7 29.9 53.2 7.8 9.5 16.7 34.4 24.1 23.8 33.1 25.7 31.2 5.3 22.4 31.3 58.5 23.6 18.1 18.6 52.0 24.9 25.7 12.1 18.2 13.5 7.4 55.9 55.1 9.8 13.0 16.9 6.4 24.9 8.9 58.7 14.6 54.4 14.3 5.0 16.7 7.8 29.7 29.9 53.2 7.9 17.9 4.7 7.7 18.8 26.3 17.3 26.3 9.9 25.9 55.1 13.5 6.5 27.1 53.3 15.2 13.4 13.

9 6.7 3.3 26.3 26.0 12.1 61.7 5.8 49.0 5.2 14.3 21.1 16.6 5.5 21.3 28.2 9.3 12.7 18.8 22.2 5.4 11.5 9.6 15.5 6.3 27.6 21.9 19.3 28.7 16.4 26.9 3.8 28.6 20.4 24.4 13.0 28.5 21.1 51.6 4.6 9.9 29.1 11.4 51.7 8.1 26.3 26.2 12.7 14.5 3.1 6.4 26.9 14.3 26.6 20.6 4.3 25.8 25.3 9.9 Downstream Margin 12.0 52.5 17.9 5.1 15.1 21.1 6.8 27.4 4.6 15.3 26.3 9.1 11.9 28.2 25.7 53.7 6.7 3.9 14.3 58.9 27.3 26.9 26.9 9.4 6.4 7.2 20.3 7.0 5.2 26.0 6.4 21.9 4.5 4.7 14.1 54.5 5.2 28.5 6.5 19.3 7.8 50.4 6.5 11.9 49.7 6.RUL Canada Avg Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Jan-96 Feb-96 Mar-96 Apr-96 May-96 Jun-96 Pump ex-tax Rack Crude Price Pump 10 city Avg Edmonton 26.7 53.1 57.1 Tax Content 26.9 58.0 28.6 19.1 24.1 26.1 15.8 28.2 11.5 13.5 54.4 26.9 12.3 26.2 Gross Marketing Margin 4.6 27.4 6.7 25.2 20.4 26.7 25.2 14.1 14.5 21.2 7.7 24.6 53.3 4.4 5.7 24.3 26.4 25.3 6.0 54.3 13.5 20.7 12.3 21.6 10.3 4.5 3.2 27.2 54.7 23.0 11.5 2.1 14.0 6.2 4.1 11.4 25.5 13.8 52.4 28.2 7.7 52.0 6.0 24.1 55.9 11.3 23.9 49.3 55.0 29.2 26.4 16.1 source: Natural Resources Canada MJ ERVIN & ASSOCIATES 87 .6 23.6 12.2 15.7 5.0 28.0 57.2 23.5 25.6 11.1 14.5 28.0 53.5 5.7 51.8 17.4 32.0 26.7 26.1 15.8 29.2 14.5 11.2 25.6 53.0 25.6 3.0 14.3 4.3 9.0 28.6 16.1 3.9 23.4 6.7 7.5 53.0 28.3 53.1 20.7 29.0 25.1 10.1 11.1 26.9 17.5 7.8 23.3 8.2 7.8 20.0 14.5 6.7 15.6 10.1 51.0 12.5 7.5 14.6 17.0 9.5 15.3 26.2 4.7 13.5 55.5 23.1 Gross Refiner Margin 7.2 26.8 6.0 27.4 21.9 27.7 7.8 10.0 9.1 6.7 13.8 23.8 4.3 54.9 29.9 4.5 19.1 6.2 7.9 12.7 26.2 49.7 53.0 26.4 15.

710.1 23.839 2.5 25.354.254.2 24.9 21.7 18.744.7 21.176 2.411.516.301 2.580 3.518.029 2.439.180 3.930.510 3.325 2.291.4 32.628 3.089.995.056 3.688.739.720 3.781.671.2 27.338 3.130 3.485 2.270 3.889 3.966.932 2.960.373.287.298 2.853 2.818.000 3.480.437.9 19.232 3.796.646 2.370 2.201.7 24.287 2.461 3.887.801.633.703 2.8 28.802 2.027 2.045 2.4 24.140.141.035 2.930 3.843.188 3.427.931 3.771 3.970 3.979 2.490 3.873.998.0 20.346.644 3.269 2.316.132.245.085.709 2.262.218.4 29.767.765 3.2 21.693 3.4 24.403 2.299 2.5 22.1 29.479 2.083. and Pump/Rack Prices Net Canadian Closing Supply: Gasoline Canada Production (M3) Inventory (M3) Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 2.4 21.073 2.377.661 Canadian Domestic Gasoline Sales (M3) 2.030.0 28.0 24.300.8 30.630.152 2.5 27.572 2.752 2.619 2.4 31.097 2.246 2.7 29.102.422.673 2.933 3.202 3.886 3.5 31.070.684 2.039.176 3.254 2.180.509 3.331 2.019.193 3.462.281 2.566.220.7 29.9 23.191 2.2 23.2 22.6 21.324 2.389.025.160 3.725. Demand.865.469 4.874 3.876.620 3.589 3.8 MJ ERVIN & ASSOCIATES 88 .880 Canadian Retail Gasoline Sales (M3) 2.682 3.199 2.095 2.6 28.9 30.378.773.141.8 29.897 2.381 2.5 30.687.894.429 2.206.958.182 3.020 2.1 22.301.7 31.075.256 2.970.2 26.642.070 3.864 2.840.Table C: Canadian Supply.458.897 3.532.456 2.416 2.180 2.2 20.3 Canada Avg RUL Rack Price (¢/l) 35.345.9 23.968 3.831.743 2.5 28.095.599 2.677 3.026 2.890.667 2.141 3.732.067.830.823.473.015 3.498.122.112 2.682.8 33.1 23.871 2.047 2.101.437.323 3.669.622.1 16.636.202.1 23.714.627 2.2 29.748.900.941 2.775.969 2.279 2.7 29.022.808.822.893.002.600.613 3.477.113.565.973.429 2.612 3.2 27.837.804 2.114 3.8 21.9 22.853.294.168 2.976.101 2.521 2.8 27.3 22.164.369 2.299.335 2.475 2.045 2.544 3.767.179 3.120.661 Canada Avg ex tax RUL pump price (¢/l) 39.9 26.904.255 3.415 2.3 22.315 2.897.801.131.044 2.5 27.672.934.3 24.641.5 19. Inventory.499 2.804 3.051 3.9 31.853 3.735.286.935 3.2 26.322 2.6 23.081.967 2.142.333.181.844.779 2.952.3 26.5 32.412 2.647.621.859 2.7 24.254.592 2.242 2.251.045.813 2.301.8 23.626.827 3.604 2.979 3.379.651 2.8 22.884 2.8 26.443 2.502 2.430.4 22.409.192.235 3.4 21.326.295.666.782 3.476.636.2 27.193 3.1 21.130 3.508.637 3.501.878 2.938.7 34.558.361.321.283.799.369.011 2.037 2.3 23.209.263.633 2.297 2.558.833 2.366 2.9 29.9 23.2 27.9 26.841 2.455.970.003.7 26.047 3.785.133 3.450 2.122 2.716.615 2.285 2.810.869 2.287 2.250.2 23.748 2.609.3 23.311 3.4 25.709 2.6 26.322 3.329 3.9 17.108.8 23.654.733 2.5 23.161.441.218 3.564 2.7 28.313 2.322 2.268 2.729.6 24.587.625 2.798.457 2.151.281.883.

7 Canada Avg RUL Rack Price (¢/l) 20.871 3.984 3.825.370.555.970.606.148.141 2.977.483.068.6 20.656 3.703 3.5 21.205 2.8 28.4 26.4 25.294 3.806.671.830 3.324 2.692.346 2. demand.0 25.2 26.857.607.617 2.7 22.928 3.204.006 3.250.840 2.5 21.6 20.074.601 3.112 3.799 2.881.338 2.195.9 27.796.219 Canada Avg ex tax RUL pump price (¢/l) 27.182.0 26.320 3.961.0 25.005 2.679.198 2.660 3.469.644 3.414 3.593.9 29.264 2.8 24.123.0 24.198.8 21.994 3.390.082.170 3.Net Canadian Closing Supply: Gasoline Canada Production (M3) Inventory (M3) Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 3.149.324.638 2.675 2.620.773. inventory) / Natural Resources Canada (price) MJ ERVIN & ASSOCIATES 89 .2 25.997 2.519.165.048.155 2.8 25.2 25.317 2.336.5 source: Statistics Canada (production.037 3.648 3.4 20.055 2.9 22.0 26.930.986.936 3.940 2.1 24.864 2.714 2.785.480 2.214 2.649.919 2.097.376.382.7 19.904.386 3.426.4 26.244 3.179.863.222 2.791 3.264 2.649.442 2.597 2.965.386 3.658.170 Canadian Retail Gasoline Sales (M3) 2.7 21.184.077.415 2.315.130 3.8 20.667 Canadian Domestic Gasoline Sales (M3) 3.566 3.1 21.906.717.5 25.198.889.521 2.539.505 2.669 2.753 3.516 3.999 3.537.261.467 2.797.363.344 3.614.

9 50.8 54.5 57.9 53.5 57.0 62.8 56.5 59.7 45.2 46.8 56.5 60.0 59.6 52.2 48.1 43.0 61.0 61.9 59.9 55.5 51.4 54.2 62.8 53.0 62.5 51.5 59.2 63.5 57.1 49.7 65.9 55.1 60.8 52.6 62.4 49.2 51.3 48.2 55.5 61.2 50.9 56.4 58.2 51.9 48.8 52.5 60.5 56.9 51.5 53.5 57.2 47.2 50.9 52.0 Sioux Lookout 62.5 58.5 55.5 58.7 54.0 46.9 64.1 44.0 55.8 48.7 62.9 52.7 50.8 56.9 61.6 55.5 58.9 52.6 56.9 53.1 49.9 56.8 57.5 58.8 64.5 Vancouver 53.8 52.9 53.9 56.8 50.9 56.9 49.4 56.9 56.9 53.2 59.6 54.3 54.6 51.3 50.9 51.2 62.0 61.7 54.5 56.5 50.Study Markets RUL Pump Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Victoria 54.9 44.9 54.9 53.9 64.9 61.7 48.1 41.8 56.1 55.7 53.9 49.9 54.9 MJ ERVIN & ASSOCIATES 90 .4 61.9 53.0 61.8 51.4 53.9 61.4 52.9 54.9 52.9 62.2 65.9 51.5 51.5 60.9 46.7 65.2 62.3 52.1 44.5 58.4 56.7 62.9 52.5 56.2 62.9 52.7 65.5 45.6 55.4 48.8 48.7 52.9 53.7 65.7 51.9 61.9 53.6 53.9 57.0 50.7 51.7 White Rock Calgary 45.4 55.9 56.8 47.5 52.1 56.4 Winnipeg 49.4 59.6 46.5 53.4 46.9 61.8 57.3 50.9 58.4 46.4 56.9 56.5 59.Table D: Pump Price History .0 61.0 59.9 53.1 55.8 49.8 48.5 58.9 58.3 51.7 53.5 58.7 57.5 58.3 54.6 49.9 47.2 50.9 63.2 61.5 52.3 49.0 61.9 62.9 55.4 52.5 49.2 57.2 62.4 57.9 55.9 47.9 53.5 53.5 54.5 57.6 50.4 58.7 46.4 55.9 44.3 42.2 43.5 46.1 49.0 52.6 47.4 47.8 53.8 55.7 57.6 54.9 54.4 50.4 54.4 52.2 56.4 57.2 58.3 55.8 53.6 48.9 54.2 62.3 48.9 56.8 52.7 48.5 58.4 55.4 54.5 57.9 58.4 55.9 59.4 46.3 59.6 47.5 56.4 65.6 46.0 61.7 54.7 52.4 61.5 59.4 52.2 54.6 48.3 49.9 53.5 57.9 45.5 59.9 54.9 47.8 56.9 54.5 56.4 63.8 41.2 54.7 45.3 55.7 50.4 61.5 54.5 61.6 59.2 62.8 50.1 55.3 52.5 57.2 62.0 58.3 61.7 44.2 54.1 53.5 60.4 53.9 56.5 57.8 45.4 55.5 60.0 52.2 46.5 45.5 57.2 46.7 63.1 53.5 47.5 57.9 56.3 52.4 56.8 59.6 58.9 58.5 59.3 52.2 62.2 65.3 52.9 47.5 58.1 50.9 54.8 56.6 58.4 56.5 59.9 52.9 64.0 39.5 57.6 50.1 52.5 47.5 62.4 52.6 48.9 64.9 57.5 57.9 49.8 47.3 62.2 Nanton Peace River Regina 49.5 59.2 51.4 55.9 56.8 59.1 50.4 53.0 62.3 56.9 58.7 53.8 53.5 51.5 60.7 51.5 47.4 56.6 47.7 65.0 57.0 44.0 54.1 52.5 58.5 58.6 53.9 61.6 44.5 51.0 48.1 59.8 Thompson 59.8 52.5 55.8 48.9 64.7 49.9 51.5 59.8 44.

5 51.4 53.2 56.5 61.4 58.2 55.9 61.1 51.0 54.7 54.3 54.5 56.5 63.1 54.5 67.4 57.0 51.9 58.1 53.5 57.9 58.6 63.9 60.3 56.0 52.3 56.2 51.1 55.8 61.7 56.7 48.9 55.5 55.Study Markets (cont’d) RUL Pump SS Marie Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 52.0 53.7 58.0 55.3 52.6 52.1 54.8 55.5 54.5 53.1 52.4 51.5 Ottawa 58.6 60.3 53.8 53.8 47.9 61.2 54.9 62.6 53.2 56.5 51.7 53.6 54.6 50.0 59.2 58.1 60.1 55.3 54.9 53.5 56.9 55.6 55.6 63.2 53.5 61.8 55.3 56.2 59.7 57.8 55.7 54.8 52.3 55.6 56.1 52.6 54.6 51.0 50.5 54.5 60.6 55.1 52.2 57.5 57.1 56.0 60.9 53.5 53.9 55.7 44.8 56.0 48.3 54.2 50.1 58.2 Montreal 63.5 52.3 55.4 58.4 45.9 60.4 49.5 59.2 49.8 54.0 61.0 56.8 55.2 53.2 56.7 54.8 50.1 57.9 52.0 48.9 51.7 56.6 49.9 56.8 59.9 56.7 51.5 57.2 57.6 54.4 58.2 57.5 55.4 54.1 49.5 48.2 58.3 55.2 52.4 58.3 52.4 51.3 60.0 57.9 57.2 57.9 49.2 60.3 57.2 55.4 55.7 57.8 53.6 Canada Avg 55.9 55.6 59.2 54.9 57.7 51.9 61.3 55.4 53.1 61.4 52.0 60.0 59.8 55.3 59.0 53.4 58.8 54.9 49.9 54.5 54.5 51.5 53.6 56.7 56.1 61.2 57.8 52.1 54.3 58.3 53.7 52.0 51.2 49.3 53.5 54.7 54.5 64.0 61.0 55.3 55.6 52.2 57.2 55.4 53.6 58.2 54.1 55.2 54.7 55.6 54.3 56.2 60.0 59.0 55.6 58.9 64.0 50.5 52.6 52.3 56.0 50.1 56.8 54.7 57.9 55.1 53.3 54.2 57.9 61.3 52.5 59.2 54.9 56.6 53.5 58.1 56.0 52.3 59.9 60.5 55.6 56.7 48.7 52.5 57.4 54.3 51.9 53.8 Halifax Charlottetown 60.0 55.5 57.6 63.6 53.1 51.7 56.8 55.6 51.1 53.6 50.4 50.1 54.4 58.3 55.5 56.1 53.9 54.9 57.1 57.2 56.3 54.2 58.4 54.8 49.4 54.6 61.8 56.7 59.2 57.3 49.0 57.3 62.3 61.6 58.2 56.5 MJ ERVIN & ASSOCIATES 91 .2 51.6 52.5 56.2 61.6 55.7 51.8 60.3 54.0 47.6 52.0 56.0 60.4 54.2 56.9 64.9 63.8 49.3 54.9 55.7 57.1 58.3 54.4 54.4 52.2 52.2 61.5 52.7 47.7 51.9 50.0 54.0 57.6 54.5 63.4 60.5 63.6 59.6 50.2 53.6 49.0 47.8 51.3 59.7 56.1 58.6 52.7 54.0 52.1 Toronto 52.6 53.Table D: Pump Price History .8 55.3 53.8 57.1 55.7 58.9 55.7 59.4 57.6 58.8 53.8 50.5 53.5 59.6 55.0 56.5 64.8 55.5 61.6 54.9 57.7 50.6 58.5 51.6 55.9 55.7 46.5 54.9 55.5 54.5 60.2 52.9 55.3 49.4 55.1 55.2 55.4 57.0 52.0 54.1 54.7 54.5 52.0 54.8 50.1 61.6 51.9 61.0 52.2 55.9 56.6 59.1 59.2 55.2 61.4 57.9 49.4 51.6 57.1 59.2 57.0 57.7 49.3 53.5 56.4 57.6 61.2 Chicoutimi Gaspé Saint John 60.7 53.0 49.3 59.2 49.6 54.8 54.1 60.2 51.6 55.4 54.8 60.9 64.7 56.2 56.3 52.6 55.7 57.1 48.4 53.0 55.1 57.1 54.7 64.4 54.0 55.1 53.1 51.8 61.9 53.2 56.7 60.7 52.9 49.0 52.8 63.1 58.9 53.3 54.0 53.8 57.8 57.6 52.1 55.4 57.0 60.2 57.0 58.2 59.2 49.5 54.9 54.6 56.

8 27.8 28.1 28.1 31.6 26.0 27.0 23.0 27.4 27.3 26.0 31.8 29.7 30.0 28.6 23.9 27.9 Oct-94 32.4 29.1 25.2 28.1 19.5 24.1 28.7 26.7 Jan-95 27.2 26.6 27.7 Jan-92 31.8 27.1 22.9 21.3 29.4 25.3 29.5 24.9 25.3 26.7 28.3 21.9 24.0 25.8 Feb-94 24.7 31.2 22.4 27.8 24.9 30.2 Nov-92 31.5 29.5 Nov-95 30.7 29.4 29.0 24.6 Sep-93 28.3 29.7 Winnipeg extax 27.3 29.7 29.7 28.4 Jun-95 30.2 Nov-94 29.6 26.9 Aug-93 30.9 25.3 27.0 25.5 Jul-94 29.1 Apr-95 30.3 30.3 29.8 26.2 32.4 29.6 28.6 May-95 29.4 31.9 29.3 23.8 27.6 Aug-95 30.8 Toronto extax 26.0 Oct-93 28.2 24.0 25.6 26.3 28.6 27.9 29.6 22.8 27.6 28.8 24.9 24.9 26.6 30.4 30.3 29.4 20.0 Jun-93 26.7 25.3 Jul-92 31.7 Aug-92 24.3 32.6 30.3 28.4 31.8 22.2 26.4 30.8 31.5 26.0 Apr-92 30.3 23.7 30.1 24.1 30.5 21.0 23.3 30.1 24.4 29.3 27.8 28.6 29.8 27.4 27.2 28.5 27.8 26.5 26.4 27.3 28.8 29.2 26.0 23.4 27.7 27.1 Mar-95 29.3 28.2 Jun-94 31.0 23.9 30.7 28.6 30.3 24.1 30.8 26.0 May-92 28.7 24.2 29.2 28.1 25.5 Sep-92 29.5 23.3 30.8 25.4 23.9 24.8 24.9 26.0 32.8 29.7 26.2 27.6 29.7 Mar-94 28.6 24.4 20.4 30.5 29.5 27.4 22.4 Mar-92 28.2 29.4 20.5 23.9 28.3 30.9 27.6 22.Study Markets RUL Extax Victoria extax Vancouver ex Calgary extax tax 32.9 27.9 26.0 22.8 25.9 28.7 30.1 23.7 28.1 27.4 21.2 25.6 23.4 Dec-92 31.6 25.8 27.4 29.4 23.8 29.1 27.4 25.8 23.6 29.0 26.5 Oct-92 30.4 30.6 21.1 22.5 27.4 31.8 Jan-94 25.9 29.7 Sep-94 32.7 26.5 27.5 29.2 Nov-93 27.4 MJ ERVIN & ASSOCIATES 92 .6 Jun-92 32.7 30.5 Jul-95 30.0 26.9 30.7 28.3 26.5 28.9 23.2 24.1 24.3 26.8 28.4 22.2 28.2 Apr-93 28.5 Feb-92 28.4 25.6 23.1 25.8 Dec-93 26.4 31.6 26.3 29.5 27.3 31.2 26.4 28.5 21.7 28.8 26.7 27.5 Oct-95 30.5 25.4 28.9 25.2 27.1 20.2 25.4 31.9 28.3 29.0 24.6 26.5 24.6 29.0 May-93 29.2 24.4 28.6 Mar-93 28.5 29.1 26.6 27.6 27.7 30.0 26.3 Feb-95 26.3 33.9 24.1 Feb-93 29.6 25.3 28.9 21.5 Aug-94 28.4 25.6 26.7 26.7 29.9 24.9 Jul-93 28.9 23.8 24.6 24.3 Jan-93 30.4 31.1 25.3 29.3 May-94 28.0 29.Table E: Ex-tax Pump Price History .1 Apr-94 29.3 24.0 21.4 23.9 25.2 24.6 26.3 24.4 29.2 23.1 31.2 Dec-94 26.7 Sep-95 30.9 20.1 26.9 25.4 26.7 29.0 24.3 Dec-95 Edmonton Regina extax extax 27.9 26.3 29.5 29.9 27.9 28.4 24.8 25.4 29.0 23.4 25.4 31.4 24.9 31.3 26.7 24.6 26.4 22.8 21.0 31.6 23.

4 36.5 36.8 23.2 26.0 33.7 23.7 Quebec extax 32.3 29.8 32.1 32.6 31.1 30.4 33.9 33.1 34.8 26.9 29.6 34.7 26.7 34.Study Markets (cont’d) RUL extax Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Ottawa extax 31.7 28.8 28.3 29.7 24.7 26.0 28.9 37.0 23.3 27.4 28.8 27.2 22.9 30.4 36.3 25.6 26.0 32.7 32.5 26.2 26.8 23.8 26.7 27.1 25.3 22.8 32.0 33.3 27.9 29.3 31.4 33.8 25.3 31.8 26.4 34.0 34.1 34.5 34.4 31.1 24.1 22.3 26.9 30.4 33.2 27.9 33.0 34.1 31.9 30.0 25.5 33.6 Charlottetown extax 36.7 29.7 27.0 33.7 27.0 31.8 28.8 26.6 32.7 25.9 35.9 29.2 33.6 33.0 34.8 25.3 24.7 30.6 32.9 27.4 32.7 30.3 25.1 23.4 22.3 31.6 25.3 29.9 30.3 28.0 28.0 36.6 24.6 28.0 28.3 25.6 36.6 33.2 27.7 26.5 30.6 28.6 36.6 28.2 28.9 27.1 28.9 29.1 28.6 32.8 29.1 29.2 27.9 31.6 25.8 32.7 28.5 25.9 26.1 24.8 23.2 27.1 32.9 30.1 26.8 33.7 32.5 25.2 25.2 27.4 32.3 31.0 26.4 28.5 28.1 Montreal extax 31.6 26.6 32.2 30.3 26.0 25.7 23.2 26.9 32.2 27.0 27.2 36.5 31.8 29.1 29.9 28.8 27.2 22.7 28.1 30.8 25.8 30.Table E: Ex-tax Pump Price History .2 25.5 30.7 33.6 27.8 32.4 26.6 34.2 25.7 28.0 29.2 28.9 24.3 31.7 29.9 26.4 27.4 25.2 29.5 27.9 28.7 22.3 34.4 32.9 23.2 22.7 27.6 27.0 28.4 26.2 26.3 28.0 26.2 26.8 29.8 30.0 23.5 25.1 24.9 29.2 32.8 33.4 31.9 27.8 29.5 27.3 33.6 23.5 29.2 27.5 28.0 33.0 29.2 33.9 29.2 36.9 26.8 27.2 30.5 24.7 26.7 24.7 32.0 29.7 28.6 31.8 Canada Avg extax 29.8 28.7 34.2 25.3 35.4 33.6 28.8 36.4 31.9 27.4 25.1 29.3 28.3 29.4 25.7 26.7 MJ ERVIN & ASSOCIATES 93 .5 27.2 27.3 29.1 34.4 24.8 29.4 26.3 34.7 23.2 22.5 25.2 28.5 33.6 22.5 27.1 32.9 32.5 31.1 24.0 28.3 28.8 23.7 24.5 26.9 29.3 30.2 32.7 24.0 30.6 27.1 30.1 32.0 30.9 32.5 25.6 28.6 29.8 24.4 24.5 30.8 28.2 21.3 26.2 23.7 24.3 23.2 Saint John Halifax extax extax 34.2 34.1 26.5 25.2 32.6 23.2 27.0 33.2 30.6 26.8 28.8 26.3 28.9 31.2 24.4 33.9 27.4 21.5 33.5 28.4 25.0 25.8 27.2 24.6 32.0 36.0 26.6 29.3 34.8 28.0 32.5 24.5 32.9 32.3 25.6 26.8 25.8 30.7 26.5 28.

1 Halifax rack 20.0 21.3 22.3 18.7 21.4 22.2 21.9 19.4 23.4 23.7 20.9 25.Study Markets RUL Rack Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Saint John NB rack 21.8 20.3 18.4 20.1 20.4 21.1 19.8 20.5 18.1 20.5 23.3 22.2 20.8 23.4 21.1 19.8 Ottawa rack Thunder Bay rack 20.5 21.6 19.2 21.4 20.2 16.5 20.2 16.3 19.7 19.5 20.0 22.5 21.3 22.3 21.2 21.6 23.5 21.4 22.3 21.8 23.7 21.6 23.3 21.2 17.9 18.8 21.0 19.7 22.7 22.4 21.6 21.9 18.8 20.2 21.5 21.0 21.1 20.1 21.9 17.4 22.3 19.4 22.7 20.1 15.1 22.9 24.3 17.4 15.1 24.4 24.0 21.5 22.4 22.4 21.8 19.8 21.7 22.5 23.8 22.6 20.8 18.1 15.9 20.0 22.1 20.5 22.6 25.8 22.6 21.0 21.4 23.8 25.4 22.6 18.2 20.2 23.6 19.3 21.6 20.2 19.5 21.7 23.3 22.7 21.8 23.1 21.2 18.7 21.2 21.5 17.4 21.3 20.9 22.9 22.9 22.2 21.3 17.4 21.2 22.5 20.4 23.8 19.5 21.5 24.7 21.0 23.3 23.4 21.2 18.6 22.2 22.8 21.8 21.9 23.3 20.9 21.6 25.7 21.6 19.1 22.1 18.0 20.2 19.0 23.1 22.5 22.0 23.0 19.2 18.9 22.7 MJ ERVIN & ASSOCIATES 94 .8 23.8 24.4 21.1 21.6 19.5 19.1 21.2 22.0 23.7 19.7 18.9 21.4 19.7 22.6 23.2 20.5 22.9 18.Table F: Rack Prices .8 27.4 21.0 20.5 22.3 21.4 21.7 23.1 19.2 Quebec city Montreal rack Toronto rack rack 19.2 20.4 21.8 20.1 21.3 18.6 20.2 23.6 20.8 21.2 18.4 21.2 20.5 19.9 21.2 23.4 22.2 19.7 22.3 20.1 20.5 26.5 23.0 23.1 22.2 23.8 19.7 22.6 20.1 23.1 22.1 23.6 23.9 21.3 26.6 20.8 20.7 17.2 29.3 24.0 21.1 21.7 20.0 23.5 27.8 22.3 23.9 22.5 22.3 19.8 18.0 23.6 23.0 24.9 22.9 20.7 17.8 20.6 23.1 23.8 22.1 22.9 21.1 20.8 21.8 23.8 18.9 18.4 22.3 23.7 22.2 20.9 22.5 21.3 23.4 17.0 22.5 18.3 23.5 20.9 23.4 22.9 20.3 17.5 24.4 21.6 19.6 20.8 23.5 17.7 16.8 19.2 21.0 22.5 21.2 18.1 21.1 22.6 19.3 23.3 19.7 22.7 18.5 17.7 17.4 20.8 18.1 16.2 21.2 16.8 23.0 22.0 21.7 21.4 20.3 24.0 22.4 18.4 20.1 21.0 23.3 20.3 23.6 25.7 22.0 19.4 22.8 22.1 20.5 24.9 21.4 22.1 20.0 21.

3 23.5 19.8 22.5 20.9 21.2 18.6 24.2 20.4 19.4 24.1 24.5 22.7 25.5 21.5 23.7 21.8 18.4 21.6 21.8 23.9 22.6 24.5 19.2 19.7 22.5 22.3 22.6 23.4 21.6 21.7 22.5 21.3 23.2 22.0 22.1 22.6 17.2 21.3 19.7 24.7 21.7 19.2 23.7 23.3 21.4 23.7 21.Table F: Rack Prices .2 21.4 25.1 21.6 21.8 21.1 20.9 23.9 22.6 21.0 22.2 20.9 19.8 25.4 21.9 21.7 23.5 21.4 24.5 22.8 19.7 21.1 22.3 21.2 22.1 25.5 20.0 18.6 21.1 23.2 21.6 23.0 21.6 21.0 20.4 20.9 19.5 21.1 21.0 20.4 19.0 17.0 23.4 22.7 25.9 17.6 22.7 21.8 21.2 19.1 23.2 20.3 21.5 23.0 24.1 19.7 21.0 23.1 22.4 21.5 Canada avg rack 22.2 20.4 22.5 21.8 22.9 23.9 23.4 24.5 23.7 22.5 23.9 19.4 22.3 20.5 24.9 23.7 22.1 23.3 24.8 22.6 20.1 21.9 22.8 22.1 23.7 21.1 20.2 Edmonton Rack 23.5 22.0 21.3 23.9 18.5 20.2 23.1 23.0 21.1 21.4 22.6 23.2 21.5 19.1 22.5 18.1 21.0 17.9 21.4 20.0 22.6 23.6 19.8 24.9 22.7 22.6 19.1 21.1 25.3 17.2 24.9 22.3 20.0 22.9 22.5 21.5 20.0 23.7 23.0 22.7 17.3 20.9 19.9 20.7 22.8 20.6 17.2 21.5 24.2 24.1 25.6 25.0 21.7 17.8 23.6 22.7 21.2 22.4 23.3 20.1 18.Study Markets (cont’d) RUL Rack Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Winnipeg Regina rack Calgary rack rack 24.8 22.7 18.0 22.9 23.7 22.8 20.2 23.1 19.6 25.4 23.3 21.2 22.8 21.6 21.7 23.1 22.8 23.2 24.6 22.3 24.6 23.0 22.5 19.3 22.3 24.8 24.9 21.6 22.4 23.8 23.6 25.9 21.5 21.5 23.2 22.2 23.0 20.9 18.0 22.9 24.9 21.6 21.5 24.9 20.0 24.4 21.4 21.5 23.5 17.2 24.3 23.5 21.7 22.2 22.8 22.1 23.5 24.3 23.9 21.9 22.5 21.2 23.6 21.5 22.1 23.4 22.4 21.9 24.6 20.9 23.2 24.7 21.8 Vancouver Victoria rack rack 24.1 23.0 18.6 20.2 22.1 16.2 20.5 23.0 23.7 21.1 17.5 MJ ERVIN & ASSOCIATES 95 .7 23.1 23.0 24.1 22.8 20.3 17.8 20.5 18.7 24.9 21.0 21.8 24.6 23.7 22.8 21.1 18.3 18.3 17.9 19.4 21.6 23.5 21.5 22.9 21.6 21.1 23.1 21.8 20.0 20.6 20.1 20.6 23.3 22.1 16.0 24.3 23.7 20.0 23.4 24.7 24.1 21.3 22.3 23.0 25.9 19.3 19.2 22.9 20.9 24.7 22.4 18.9 22.7 21.7 21.9 22.2 23.9 19.3 24.

557.702 333.030.70 49.53 48.686 273.483 63.174.192 2.483 2.28 65.38 56.890 2.20 58.80 64.90 67.35 73.102 98.65 54.211 15.30 66.17 Diesel 64.749 243.093.60 50.10 63.687 1.834 71.70 55.30 54.636.00 67.245 351.298 576.400 142.86 56.238 2.19 49.00 57.529 123.621 102.327 Average Pump Price (¢/litre) Premium Midgrade Regular Diesel 63.060.597 2.859 240.98 59.933 25.30 63.55 58.997 397.74 57.460 833.246 2.790 185.11 58.97 63.45 63.20 59.50 55.50 56.145.25 57.00 66.332 101.832 91.30 52.94 55.009 54.749 91.698 Note: Regional.300 578.370 41.620.97 51.412 722.214 248.058 2.36 54.628 702.000 217.508 2.000 1.972 429.40 58.26 49.018 2.000 1.88 64.414 450.643 184.894 1.220 389.93 63.30 68.16 59.153 316.101 447.00 48.971 473.60 60.625 64.30 54.268 478.92 51.26 44.60 70.07 61.702.78 67.120 570.500 378.448.516.018.22 59.056.89 65.296 179.Throughput and Price by Grade 1995 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts Average Throughput (Litres) Premium Midgrade Regular 661.052 84.983 1.02 51. Urban.377 30.85 48.10 53.980 120.420.796 2.32 51.905 183.549 111.173 568.40 54.543 2.949 1.810.40 63.40 59.614 3.23 63.837 329.895 600.89 60.194.985 636.475 1.23 53.196 669.10 52.72 63.30 57.250 748.00 62.513 19.34 63.850 126.24 61.334.42 53.20 60.10 59.03 58.014 3.858.48 56.935 758.704.234 799.903 33.53 61.922 103.19 52.438 591.90 62.150 48.830 2.796 529.60 49.50 56.119 632.89 61.249.85 54.45 53.811 120.113 2.745.945.770 2.20 61.20 54.73 65.669 203.83 68.66 50.141.88 54.204.13 58.72 74.554 2.18 51.671 399.26 63. MJ ERVIN & ASSOCIATES 96 .40 61.00 57. and All Study Markets are weighted (by market population) averages.87 61.166 102.712 1.72 58.241 451.90 63.Table G: Study Market Data .678.897 350.101 256.000 63.

07 26.26 28.88 28.21 27.15 27.68 Diesel 36.43 21.39 22.43 20.30 29.09 24.18 28.23 23.45 29.51 20.74 21.69 27.31 22.40 25.65 27.59 22.63 24.49 21.27 29.56 22.01 28.49 21.45 20.25 28.15 29.45 29.36 24.85 28.47 28.83 23.88 28.88 22.75 27.33 21.01 22.53 23.26 27.92 20.08 25.47 27.59 24.33 21.93 23.96 24.43 28.83 24.34 26.54 28.34 20.35 25.94 23.88 22.65 21.98 28.23 25.59 28.39 21.81 25.16 21.55 28.07 24.03 24.11 26.28 23.84 28.Rack Price.45 20.57 22.33 27.38 24.20 27.48 25.15 24.89 29.17 20.23 26.39 21.90 26.96 24.95 25.03 21.97 23.87 26.98 25.25 27.63 21.33 22.51 31.42 24.37 27.89 26.33 21.39 22.65 26.40 27.92 22.43 20.96 22.45 24.63 26.75 22.50 20.07 24. Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts Victoria Vancouver Vancouver Calgary Regina Winnipeg Calgary Edmonton Winnipeg Toronto Ottawa Toronto Winnipeg Montreal Quebec Montreal Saint John Halifax Halifax 1995 Average Rack Price (¢/litre) Premium Midgrade Regular Diesel 26.33 22.76 25.06 28.04 26.73 26.15 20.69 23.27 20.21 27.42 25.03 20.93 27.33 22.23 24.88 20.25 31.64 28.45 24.07 24.99 28.59 28.81 21.34 25.20 20. Urban.18 25.78 Product taxes Midgrade Regular 26.83 24.32 33.89 28.73 32.95 22.51 25.93 23.13 23.63 20.41 22.91 21.38 24.82 28.95 Premium 26.83 24.97 25.51 25.92 21.49 25.90 27.97 22.36 26.50 25.82 21.45 20.83 22.45 25.02 23.59 28.07 26.25 24.45 23.63 25.33 21.89 25.43 21.45 20.16 22.41 27.76 24.04 24.32 21.88 20.81 28.58 25.55 28.39 Note: Regional.47 20. MJ ERVIN & ASSOCIATES 97 .16 29.28 22.95 22.08 23.45 22.09 27.42 27.83 25.57 29. and All Study Markets are weighted (by market population) averages.59 22.45 28.Table H: Study Market Data .81 27.63 28.99 26.33 21.84 28. Tax (by Grade) Rack Pt.42 24.92 30.49 31.

Variance uses the formula [n∑x2 .49 2.45 1.21 24.36 0.28 1.78 2.85 21. Average Deviation is the average deviation of the market values from their mean (average) value.50 10.50 0.21 8.01 31.16 3.02 3.35 58.52 30.79 33.28 27.41 12.13 28.49 57.81 26.66 28.47 58.06 28.93 22.94 17.07 0.91 0.70 22.18 21.033 0.29 8.83 27.37 26.73 22.98 1.17 9.72 26.63 58.50 3.25 1.35 27.48 7.68 7.00 0.83 36.10 6.62 56.99 0.15 66.57 12.01 0.33 9.64 3.12 23.22 5.84 28.60 14.85 24.30 5. Urban.94 22.35 28.91 29.29 24.Table J: Study Market Data .96 28.83 12.88 31.43 0.41 7.Blended Prices.93 56.17 11.04 0.07 30.94 Note: Regional.52 5.18 55.53 6.38 22.30 12.81 28.56 24.89 28.82 32.06 5.31 28. Costs.27 62.27 11.95 21.20 5.24 23.41 29.06 0.75 23.26 5.17 26.08 17.83 1.04 28.11 31.80 1. MJ ERVIN & ASSOCIATES 98 .85 26.86 49.08 55.35 60.(∑x)2 ]/n2.85 11.50 58.27 60.31 0.63 60.26 27.44 33.02 13.77 30.34 1.36 20.42 2.07 0.77 37.68 2.22 1.47 0.02 0.91 2.56 4.24 7.68 7.31 34.44 25.23 38.22 14.03 7.86 28.10 3.79 0.38 2.27 6.28 1.12 6.16 20.39 56.38 0.08 0.04 22.89 0.60 23.31 23.24 7.90 23. Margin Cents per Litre 95 Blended Pump Price 95 Blended tax 95 Blended Extax Price 95 Blended Rack Price 95 Retail Freight Cost Gross Marketing Margin 6.60 7.08 3.64 2.58 1.84 5.77 5.98 0.53 21.23 7.19 5.05 6.02 22.04 23.18 7.14 60. and All Study Markets are weighted (by market population) averages.38 28.00 58.75 28.64 3.34 0.99 2.38 7.26 3.13 0.80 9.96 27.82 95 Retail Gross Product Margin 6.51 11.30 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Variance Avg Deviation Group B Variance Avg Deviation All Study Mkts Variance Avg Deviation 57.59 4.29 7.13 11.82 3.95 6.64 1.54 50.03 28.83 21.88 5.00 22.20 14.96 25.97 0.71 33.98 0.14 7.16 54.91 22.58 66.44 56.73 1.53 22.90 59.00 4.17 1.73 10.43 23.11 26.21 8.76 5.45 6.96 3.89 21.32 31.28 56.73 2.33 .98 31.92 22.

and consolidated outlet income these averages are based only on those markets with available data.805.089.241) $ (227.067 $ 92.000 $ 156.626 $ 81. Income Average Outlet Sales (litres) Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts 3. outlet costs.510 $ 60.095.707 $ 260.900 2.658.066 3.526 $ 207.956) $ 200.913 $ 139.852) $ 119.719 3.572) $ (286.081 $ 222.467 $ 96.247 4. these averages are based on all applicable study markets.966 3.265.780 $ 85. Outlet Costs.102 $ 223.209 $ 82.068 3.208) $ (226.367) $ (164.332) $ (238.677 $ 180.875 $ 255.520 5.263 $ 60.779 $ 121.481 $ 96.640 4.948 3.244 95 net retail Ancillary Revenue petroleum revenue $ 208.071.272 $ 118. MJ ERVIN & ASSOCIATES 99 .550 694.465.648 3.604.827.279 $ 154.000) $ (241.646) $ (98.223.014.995 $ 234.911) $ (166.632 $ 256.630 3.766) $ (274.550 $ 177. and All Study Markets are weighted (by market population) averages.750 $ 271.890.564 $ 252.542.209 $ 26. For 95 net retail petroleum revenue.746 $ (374.116 Outlet costs 95 Consolidated Retail Outlet Income $ 126.622 $ 174.855 $ 278.010 1.129 $ 97.Table K: Study Market Data .197.478 4.772.Sales.542 $ 222.023 $ (15.004.058.934 3.013 $ 227.144 2.866) $ (244.429 $ 238.394.143) $ (249.074 $ 131.544 $ 175.885.032 $ 77.224 $ 189.375) $ (49.098.623 2.856 3.688 $ 85.289 981.502 $ (80) $ 60.272 $ 210. Urban. Revenue.250.117 $ 207.098 $ (320.993 $ 113.217 2.871) $ (128.716 Note: Regional. but for ancillary revenue.302 $ 69.246 $ 118.837 $ 56.794 3.800 $ 225.135 $ 199.557) $ 102.694 3.900 $ 179.120 $ 54.295 $ 174.638 2.011.157.000 2.

10 3. of Outlets No.85 15 11.40 9 4.73 5 10.24 0. MJ ERVIN & ASSOCIATES 100 .80 10 4.14 rank* 10 9 12 3 1 2 10 16 17 7 6 15 18 7 13 19 4 4 14 rank 9 5 17 3 7 6 17 13 15 2 4 10 19 1 8 13 11 11 15 Est Outlets / 10.60 3.53 10 6.465 694 3. of Brands No.33 0.310 1.095 3.745 16.52 13 5.23 6 7.55 19 11.84 12 5.17 19 9.98 7.50 9.715 14.60 11 7.40 1 3.605 16.250 981 2.089 3.50 8.89 2 4. N refers to study sample size (total = 481).51 9 11.79 6.89 7.43 12.47 14 3.22 3.73 14.97 8.98 6.41 1.394 2.45 0. rank* 3.38 0.22 0.96 5.395 rank 8 3 14 4 9 6 19 17 16 1 5 11 18 2 10 13 12 7 15 No.04 15 4.03 14 N= 26 37 5 69 30 61 2 4 4 59 39 12 2 74 16 2 17 18 4 Note: Where an * appears after “rank”.00 11.604 3. inverse ranking is used (lowest value = 1).550 1.098 4.08 3.157 2.50 3 10.01 7 2.42 5 14. 12 18 4 27 15 17 4 6 5 30 19 10 3 32 14 6 9 9 5 Freight ¢/l 0.000 pop’n No.06 16 4.45 14.88 11 8.145 81.94 18 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown Avg Volume per Outlet Marketing Margin 000's litres 3.08 4 2.48 7 7.91 12.180 616.265 2.68 4 7.06 5.90 13 4.23 8 31.20 17 14.585 6.02 0.970 330.06 1 5.658 3.475 3.775 678.88 12 7.275.30 0.27 0.071 2.890 rank 9 4 5 3 10 8 15 13 16 1 2 6 19 7 12 18 14 11 17 ¢/l 6.790 1.870 120.223 3. 106 446 8 313 86 261 5 8 6 546 209 24 3 866 97 8 56 113 23 rank 8 3 14 4 10 5 18 14 17 2 6 12 19 1 9 14 11 7 13 No.08 16 3.28 17.54 6 2.76 18 5.542.Table L: Study Market Data .014 5.Demographic Profiles Population pop’n 299 .30 1.27 1.675 179.41 0.20 0.13 2 11.29 1.400 74.91 17 4.004 3.315 710.775.975 2.29 8 7.36 5.17 rank* 7 9 9 6 8 11 3 16 17 1 4 12 18 2 15 19 13 5 14 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown Gross Product Margin ¢/l rank* 6.058 1.95 3 9.21 0.845 15.47 7.827 3.

K1A 0E4 Phone: (613) 992-1477 Fax: (613) 992-0614 MJ ERVIN & ASSOCIATES 101 . generate jobs and growth. K1P 5H9 Phone (613) 232-3709 Fax: (613) 236-4280 Industry Canada Industry Canada is the primary overseer of the Sector Competitiveness Framework (SCF). aviation and lubricants marketing channels. Senior Advisor. They work with major oil companies in benchmarking performance in the retail. Contact: Maureen Monaghan Address: 580 Booth Street. Principal Address: #400. Vice President Public Affairs Address: 275 Slater Street. Contact: Cindy Christopher. MJ Ervin & Associates is a Calgary-based consulting organization specializing in the downstream petroleum industry. Ervin. Petroleum Products Address: 235 Queen Street. bulk. and in doing so. health. Ottawa ON. accessible through a public fax-back dial-in system. Contact: Brendan Hawley. K1A 0H5 Phone (613) 941-6219 Fax: (613) 941-2463 MJ Ervin & Associates / Q1 Solutions Inc.14th Street NW Calgary AB. T2N 1Z6 Phone: (403) 283-8704Fax: (403) 283-9104e-mail: mervin@cadvision. cardlock.com Natural Resources Canada Natural Resources Canada is a key information resource on the matter of petroleum prices. a series of studies whose goal is to strengthen Canada’s competitiveness.III Sources of Information about the Downstream Petroleum Industry Canadian Petroleum Products Institute (CPPI) The CPPI is a national association of petroleum refining and marketing companies which serves as the voice of the petroleum products industry in Canada on environment. Contact: Michael J. safety and business issues. Ottawa ON. The SCF is the basis for this study. 119 . Ottawa ON. and provide background resources to industry public affairs managers and the media. They maintain a large database of historical prices at most major centres.

Energy Section Address: Statistics Canada. Contact: Robert Curran. K1A 0T6 Phone: (613) 951-3562 MJ ERVIN & ASSOCIATES 102 . non-advocacy organization whose mandate is to increase public awareness of Canada’s oil industry.ab.Octane Magazine Octane is Canada’s refining and marketing trade journal. ABT2P 3H2 Phone: (403) 264-6064Fax: (403) 237-6286e-mail: pcomm@pcf. Executive Director Address: 214.T2P 3P4 Phone: (403) 266-8700 Fax: (403) 266-6634 Petroleum Communication Foundation (PCF) The PCF is an industry funded. Managing Editor Address: Suite 2450. It reports industry marketing trends and compiles an annual survey of retail and wholesale outlet representation. 101 . Ottawa ON. 311 .6th Ave. The PCF is a useful resource for any person or organization wishing to become better informed on general downstream infrastructure and retail gasoline price/competition mechanisms. Octane is published quarterly. SW Calgary.ca Statistics Canada Statistics Canada publishes a variety of petroleum industry performance figures. and is a useful “window” on this industry. Its monthly publication “Refined Petroleum Products” (cat. Supervisor. Calgary AB.6th Avenue. Contact: Gerard O’Connor. no 45-004) is a useful source of supply and demand volume data. Contact: Len Bradley.